Passing On My Home

Toddi Gutner

The looming threat of a $1.5 million tax bill motivated me to action. How to keep our family home in Aspen and minimize or avoid the potential 50% estate tax on the $2.9 million property when my 78-year-old father passes?

I found the answer. But unfortunately, it looks like we lost the window of time do this estate planning strategy. For those who may benefit, here’s the answer. A Qualified Personal Residence Trust, or QPRT, allows a parent to pass their house to their children without huge tax consequences. Even better—rising interest rates actually benefit these types of trusts. Even if you think today’s real estate boom is over, it’s likely there will be long-term gains over the next 10-15 years—which is the time period for most of these trusts.

Here’s how these trusts work: A parent continues to live in the home for the length of the trust, usually set at five to 15 years. During that time, the parent is still considered the owner and can deduct mortgage interest, real estate taxes, and other qualified expenses from personal income tax. At the end of the term, the house passes to the kids and out of parent’s estate, regardless of its value and accumulated appreciation. The parent can stay in the house when the trust dissolves but must pay fair market rent to his children. If the parent dies before the trust ends, the property goes back into his estate and is priced at fair market value.

I asked Blanche Lark Christerson, a managing director at Deutsche Bank Private Wealth Management in New York, to run some numbers on my dad’s house. My dad’s age and a five-year-trust term just don’t give us much of an estate planning edge. Your dad would have gotten more bang for his buck if he had done the trust when he was younger and had a longer trust term, say 10 years or more, she told me.

Of course, that potential $1.5 million tax bite is my problem, not my father’s. But still, I learned something in this process. The Week magazine featured an article about how to help your children best learn about finances. Rule Four: Use a Qualified Personal Residence Trust to pass your house on to your children. At least I can plan to do that for my own children.