Transferring your legacy
3 Strategies for Efficiently Transferring Real Estate
The passage of the Tax Cut and Jobs Act (TCJA) in December 2017 has incentivized many individuals and families to not only review their estate plans, but to also take advantage of the increased lifetime estate and gift tax exemptions ($11.4 million per person and $22.8 million for a married couple for 2019). However, depending on your current stage of life and financial circumstances, transferring your financial assets now may not be practical or realistic.
Gift planning with real estate can be an effective way to take advantage of the large lifetime-exemption amount without negatively impacting your liquidity. Of course, as with any wealth transfer strategy, there are many considerations to be aware of when transferring real estate, from how to structure the transition to determining who pays for repairs on the property once it’s transferred.
If you have significant real estate assets that you plan to gift or pass on to the next generation, here are three efficient transfer strategies that can help you achieve your goals.
1) Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust (QPRT) takes full advantage of the current exclusion amount and can significantly reduce gift taxes on the transfer of the property. When a QPRT is created, the grantor transfers the residence to the trust but retains the right to live in the residence for a specified period. This right to live in the residence is assigned a value, which is subtracted from the value of the transferred property for gift tax calculation purposes. If the value of the residence appreciates while held in the trust, the appreciation passes to the trust’s beneficiaries free of additional transfer taxes. If the grantor dies before the end of the QPRT term, the value of the grantor’s interest will be included in the grantor’s estate.
2) Gift with Lease
One way to remove property from your estate is to make a gift to a trust with leaseback. This is a unique strategy that differs from simply gifting real estate to the next generation, but has similar tax benefits. To take advantage of this strategy, property can be transferred to the next generation through a trust or another entity that is owned by either the trust or the children. The grantor of the trust pays rent on the property, which can be used for ongoing carrying costs of the property.
3) Donation to Charity
Donating property to a charitable organization can be a tax-efficient way to gift highly appreciated assets while at the same time achieving your family’s philanthropic goals. Since not all charities are set up to accept real estate donations, it’s important to do your research ahead of time to make sure you select the right organization(s). Alternatively, you can donate property to a donor-advised fund, which allows you to support various charitable causes over time.
In cases where the property remains in the family, certain questions must be answered regarding the ongoing usage and maintenance of the property once a transfer strategy is implemented. These questions often include who can use the property, how usage is determined and who will pay for repairs, taxes, and insurance over time. Oftentimes, the trust is set up with an allowance of cash to pay for planned and miscellaneous expenses so that the burden does not fall to one or more children. However, it’s important to have these discussions well in advance so that both grantors and beneficiaries feel comfortable with the agreed-upon arrangements. It can also be helpful to put necessary provisions in place if family dynamics change.
Gifting real estate can be a helpful estate planning technique that has many advantages. Whether you keep the property within your family or donate it to a charitable organization that has special meaning to you, these strategies can help you achieve many of your estate planning goals while maintaining liquidity in the near term.
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The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.