By Joel M. Blau
The Taxpayer Relief Act of 1997 provided for a graduated increase in the amount that can be left estate tax free upon an individual's death. Previously $600,000, the exemption increased to $625,000 last year and $650,000 in 1999, thus enabling married individuals to pass a total of $1.3 million completely free of estate taxes.
This falls short for many physicians whose net worth exceeds $1.3 million. Often, a physician's largest holdings are retirement plans and the value of a home. Retirement assets can be excluded from the estate through a bequest to a qualified charity. Now current law allows the value of a home to be excluded through a "Qualified Personal Residence Trust" (QPRT).
A QPRT is an irrevocable trust to which an individual transfers their residence, while reserving the right to live in the home rent free for a specified term. At that time, the remainder interest passes to the specified beneficiaries, such as the children. If you fail to survive the selected term, the value of the residence will be included in your gross estate, making it subject to estate taxation. In addition, once the transfer is made to a QPRT, the value of the residence will be subject to gift taxes, but at a substantially discounted rate.
If you intend is to keep the residence to pass it down to the
next generation, this technique can be beneficial. If, the objective
is to sell the home at the time of the spouse's death, QPRT should
be avoided because beneficiaries receive a "stepped up"
basis for income taxes. If you paid $300,000 for a home that is
worth $500,000 in the estate, the beneficiaries' tax cost becomes
$500,000. If you anticipate the need to sell your residence at
retirement, buy a less expensive home and use the proceeds for
retirement, the QPRT should be avoided.
Joel M. Blau is president, MEDIQUS Asset Advisors, Inc.