Q: What kind of trust is the Qualified Personal Residence Trust?

A: The Qualified Personal Residence Trust (QPRT) is an irrevocable trust.

Q: What kind of property qualifies for a QPRT?

A: You can fund either a primary or a secondary residence into a QPRT

Q: What’s the purpose of a QPRT?

A: A QPRT gives you two types of tax benefits: initially, it gives you a gift tax break because you’re gifting property to the beneficiaries, but they’re not getting an immediate benefit, so the value of the gift (and therefore the amount of gift tax) is reduced.

Then, assuming you outlive the “retained income period”, the value of trust property is removed from your gross estate, so the trust also provides an estate tax reduction.

Q: What are the steps in forming a QPRT?

A: First, you write the trust agreement. This involves naming both the initial and successor trustees, deciding on the retained income period for the trust (how long you want to live in your home before it passes to the beneficiaries), and naming the beneficiaries of the trust.

Next, you fund the trust by transferring the property to the trustee. This is when you file your gift tax return and pay the (reduced) gift tax.

After you transfer your property to the trustee, you continue to live in the property for the retained income period.

Q: What happens after the retained income period?

A: After the retained income period, you either move out and turn the property over to the beneficiaries, or you can arrange with the beneficiaries to stay in the property and pay them rent.

Q: What if you don’t outlive the retained income period?

A: If you pass away during the retained income period, then the property is included in your gross estate, and you’ll lose the tax benefits.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

The big news in estate planning this year has been the status of the federal estate tax. The tax has been repealed for the year 2010, and is scheduled to be automatically reinstated starting January 1, 2011. That is, if Congress doesn’t do anything to change the law. And Congress hasn’t done anything – yet. Experts seem to agree, though, that legislators want to change things; it’s just a matter of when…and what changes will be made.

If the estate tax is automatically reinstated on January 1^st, the pool of people subject to the tax would grow. This is because the estate tax exemption will be lower than it’s been in nearly a decade; $1 million for 2011 as compared, for example, to $3.5 million for 2009.

Because it’s not just the very wealthy who would be affected under the automatic reinstatement, Congress would appear to have incentive to pass legislation changing the law. There have been a few proposals submitted by legislators on both sides of the aisle, both increasing the amount of the exemption and decreasing the tax rate. However, no action has been taken, and none is expected at least until Congress comes back from summer recess – and possibly until the end of the year.

Another concern surrounding the estate tax is that legislators might vote to retroactively apply an estate tax for the year 2010. While this is still a possibility, the consensus seems to be that the longer Congress waits to enact a retroactive estate tax, the less likely this tax will be.

The uncertainty that has occurred this year is a great reminder of how important it is to regularly review your estate plan. Even if nothing has changed on a personal level that would necessitate a change to your estate planning documents, the law can and does change, and legislative action can throw a wrench into even the best-laid plans.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

The Grantor Retained Annuity Trust (“GRAT”) is an advanced estate planning tool that benefits people with a high net worth who want to reduce their estate tax and gift tax burden while making a large transfer of appreciating assets to their children, grandchildren, or other beneficiaries. Here’s how it works:

You, as the grantor, set up an irrevocable trust and fund it with a single transfer of assets. The assets have to be income-producing, and they should be expected to appreciate at a rate higher than the IRS assumed rate of return. When you establish the trust, you also set a termination date for the trust. While the trust is in existence, the trustee pays you an annuity from the trust. Your annuity is either a fixed dollar amount or a percentage of the trust income. At the termination date of the trust, the trustee distributes the trust assets to the beneficiaries you named when you established the trust.

Here’s why there’s a tax savings:

You save on estate tax because, by making the transfer of assets, you’ve reduced the overall size of your estate, and therefore the amount of your estate tax. The estate tax on the trust assets is calculated as of the date the assets are transferred to your beneficiaries, so the strategy only works if you’re alive when the transfer happens. If you die before the trust terminates, then the strategy fails and your estate is taxed on the value of the assets.

You save on gift tax because, although you do pay gift tax on the transfer, you only pay it once, and it’s when the assets are funded into the trust. So, assuming the assets appreciate at a higher rate of return than that predicted by the IRS, your beneficiaries may receive a great deal of money tax-free.

GRATs are not for everyone, and there is a certain amount of gambling involved in establishing one. A qualified estate planning attorney can help you determine whether a GRAT is right for you.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.