When you order your Technique Book, you'll see 97 of these information-packed cases. Each one is set up identically, with the narrative you'll read below appearing on the left side and the corresponding illustration facing it, on the right. What could be simpler?

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Pertinent Information

  • Mrs. Kugler (age 60) owns a residence with fair market value of $1,000,000 and no mortgage.
Goals and Objectives

  • Mrs. Kugler is very concerned about shrinkage of the estate at death due to estate tax.
  • She is willing to consider a future interest gift, but is reluctant to make a large current gift.
Proposed Arrangement

  • Consider a future interest gift of the residence via Qualified Personal Residence Trust.
  • The Trust allows a considerably larger gift than actually reported for gift tax purposes.
  • Assume a 15 year trust and 8% IRC Section 7520 Rate.
  • Mrs. K retains the use and enjoyment of residence for the 15 year Trust period.
  • Trust will contain a provision that will allow the residence to revert back to Mrs. K's estate if she does not survive Trust term (will then pass to Mr. K via marital deduction).
Taxable Gift Calculation

Results and Benefits

  • Mrs. K reported a gift of just $215,000 (actuarial value of the remainder interest) and in 15 years will have removed $2,080,000 from her estate (assume 5% appreciation for duration of trust).
  • If Mrs. K does survive 15 year period, residence would then be owned by the children. Thus, Mrs. K must then pay reasonable rent to the children for use of residence.
  • Rental payments, in effect, result in further estate reduction without gift tax considerations.
  • If Mrs. K does not survive 15 year period, residence reverts back to her estate. The $215,000 gift amount is then restored. Thus, there is no loss of Applicable Exclusion Gift Amount.
  • If Mrs. K survives the Trust term, the children will take the residence with her income tax basis.
  • Note: the trust document must provide that Mr. or Mrs. K cannot buy the residence during the trust term.
The Grantor transfers the residence to an Irrevocable Trust for a stated period of years. The Grantor retains the use of the residence for the Trust period, and residence then passes to the remainder beneficiary (Grantor's children).

Note: if desired, the Grantor (Mrs. K) could provide the spouse with a life estate in the residence after the 15 year period ends. The Gift Tax calculation would not change.

Note: there is a possible GST Tax if a child dies during the term of the Trust since the Pre-Deceased Child Rule is not applicable (child was alive when the Trust was established).

Go to Sample Case #2