THE TAX BLOG // MAY 12, 2011, 9:27 AM
By Arden Dale
Lower real estate prices and higher gift tax limits are making this the perfect time for some wealthy individuals to gift vacation homes. An individual can give up to $5 million during his or her lifetime without paying a gift tax, and for couples that threshold is $10 million. Before, the limit was $3.5 million per person.
The higher limit only applies until 2013, and clients aren’t waiting, says Jay D. Waxenberg, chairman of the personal planning department at law firm Proskauer in New York. “We don’t know what’s going to happen,” he says.
Another consideration is the low price of real estate. When a cottage on the coast of Maine or a cabin on a lake in northern Wisconsin is worth less, the potential tax impact is smaller.
But some things need to be weighed carefully before making a gift of a vacation place, tax advisers say. Once ownership is transferred, parents or grandparents lose the legal right to decide who gets to use the place and when, whether it can be rented out and who is in charge of upkeep.
To retain some control or for tax purposes, owners typically use a trust. One health-care executive, for example, plans to pass a $4 million Jersey shore house in two trusts to his children, who are in their 20s. One trust will be in the man’s name, the other in his wife’s.
The trusts, a popular kind known as a Qualified Personal Residence Trust, or QPRT (pronounced “KYOO-pert”), transfer ownership over time and get the property out of the grantor’s estate for estate tax purposes. The couple still has to decide how long to make the trusts last. They may set a 20-year term for the man, who is in his late 50s, and a 25-year term for the wife, who is a bit younger. If they die too soon, the property goes back into their estate, and heirs owe tax on it.
A Massachusetts couple in their 60s, retired from the real estate business they owned, are using a different kind of trust to give away a place on Cape Cod to their three children, who range in age from 20 to 30.
The two will sign a deed to make the trust the new owner of the place outright. That way, they will no longer own an interest in it, as they would had they used a QPRT, according to Perry Ganz, a partner at Boston law firm Tarlow Breed Hart & Rodgers, who is working with them. They will still use the place sometimes, but pay rent to the trust when they do.
The couple is also doing what many people who give away a home to kids like to do: making another gift to the trust to pay for property taxes, insurance and maintenance on the place. That can help prevent squabbling among siblings later on.
Readers, are you thinking about gifting real estate to your children? If so, how?