Thursday, September 6, 2012
As I have previously mentioned, estate tax provisions allowing for a $5 million exemption are set to expire at the end of this year. Now is the chance for wealthy families to transfer assets with little to no federal gift tax. Many wealthy people have already taken advantage of this opportunity, but some clients lack liquidity to do so. Much of their wealth is tied up in business, real estate, venture capital, and/or personal residences.
Rob Clarfeld, a wealth strategist, has a recommendation for how clients can still take advantage of the opportunity that remains this year without impinging upon liquidity of their estate. Rob recommends gifting one’s personal residence to an intentionally defective grantor trust (IDGT). This can be an ideal way to remove the asset and the future appreciation from one’s estate while still remaining in the residence as a tenant. The steps to make such a transfer are as follows:
1. Set up an IDGT, which allows one to remove transferred assets from your estate for estate and gift tax purposes, but not for income tax purposes.
2. Get an appraisal of the fair market value of the residence.
3. Transfer the residence to the trust.
4. The trustee is then responsible for collecting rent and paying the expenses of the residence.
There are numerous benefits to making this transfer. The rental income will not be taxed, and real estate taxes or mortgage interest deductions flow through to the grantor’s tax returns. Furthermore, if the rental payments are consistent with the residence’s fair market rental value, they are also gift-tax free. Any rental income that the trust accumulates in excess of its expenses is considered tax-free additions.
See Rob Clarfeld, Reduce Estate Taxes Without Reducing Your Liquidity, Forbes, Sept. 4, 2012.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.