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Consider a Qualified Personal Residence Trust
By the Financial Planning Association |
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The death tax is quite likely to live on, so high-net worth individuals may want to consider a QPRT (qualified personal residence trust).
The Obama Administration has indicated its plans to block the estate tax from disappearing in 2010, though to offer a bit of relief, it might freeze it at the rate and exemption levels that took place this year.
That would mean that estates worth up to $3.5 million for individuals and up to $7 million for couples would be exempt from any taxation and those above those amounts would be taxed at 45%. (At the end of the Clinton Administration, estates of less than $1 million would be excluded with the remainder over $1 million taxed at a 55% rate.)
Even with the downturn in the real estate and stock markets, it’s a good time for high net-worth individuals and couples to look at ways to shelter their estates from the possibility of taxes going forward. One possibility for couples who have a substantial investment in real estate is considering transferring their residence into a Qualified Personal Residence Trust (QPRT). A QPRT is a trust that owns the home at a discounted value for a specific term while allowing the parents to continue living in the home.
The QPRT works best for those people who expect to live another decade or so; the longer the term of the trust, the greater the benefit to the kids. Yet you’re essentially playing a game of chicken with the Grim Reaper—if one or both of the parents pass away before the trust expires, the heirs have to pay the estate tax on the value of the house.
A good first step in finding out if a QPRT makes sense is to talk with a qualified estate planning attorney and tax advisor. Such a trust has to be set up carefully with a thorough review of actuarial tables and a discussion of each parent’s financial history. The folks at Capital Advantage, Inc. are a good resource for referrals to qualified estate attorneys and certified public accountants.
Technically, QPRTs make the most sense when interest rates are high, because the higher the interest rate, the greater the discount applied to the property, which, in turn, increases the tax savings. A QPRT is based not on the current value of the house at the time the trust is being written, but what is determined to be the present value of a future gift, which is actually a discount to the current value. When a home is placed into the trust, its value is not the current value of the house, but what is called the "present value" of the future gift - a decrease of 25-50% in value. The Internal Revenue Service calculates these formulas, so ask your advisor how current calculations will affect the value of your estate.
Another potential benefit of the QPRT is that if the parent runs into trouble with high hospital or medical bills, the hospital cannot demand any money gained by refinancing or selling the house, since the occupant does not have any right to that money.
If the rough real estate market has devalued your home at least a little, chances are that the market may rebound sometime during the term of the trust and if you outlast the expiration date of the trust, the strategy may work out very well for your heirs.
Obviously, there are a number of considerations here, not the least of which involves the current value of the property. Your adviser should help you consider all these issues, and you should keep an eye on the news for what eventually happens with the capital gains tax as well as what ends up happening with the estate tax.
If the parent outlives the trust, the parent can continue to live in the house by paying the kids fair market rent. There’s one more wrinkle to try if the kids want to avoid income taxes on the rent they’ll receive from their parents—they can form a grantor trust for the property so the rent is paid to the trust.
Please call our office at (925) 299-1500 or toll free (888) 299-1500 if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.
The above article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided and revised by Capital Advantage, Inc., a local member of the FPA.
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February 2009 -
Client Market Update
By Capital Advantage, Inc. |
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In light of the current economic environment, we are increasing our levels of client communication. Moving forward, we will be providing you with monthly updates regarding our investment strategies and tactics, and more often should we make material changes to our strategy.
Current Outlook:
This year began right where 2008 ended, as markets around the world continue to contract. January ended with historic declines for both the Dow Jones (down 8.6%) and the S&P 500 (down 8.3%), while small cap (Russell 2000 down 11.2%) and international stocks (EAFE down 11%), fared worse. The economy failed to provide reason for optimism. We experienced sizeable increases in job losses and home foreclosures, and falling consumer spending and tightened credit continued to push markets down. The earnings season is now underway, and the S&P 500 is facing its sixth consecutive quarter of negative growth. It hasn’t been since the early 1950s when Harry Truman was president that we matched this record of futility.
Current Strategy:
Amidst this recession, Capital Advantage, Inc. is more concerned with ‘return of capital’ than ‘return on capital’. We are currently in a defensive mode (as we have been for over six months) and are the most defensive we have been in our firm’s history. Based on the economic information made available, we have continued reducing equity allocation while increasing allocation to both fixed income and money markets. It appears premature to invest in REITs or commodities, and we believe international developed and emerging markets will most likely continue to fall.
A bull market always exists somewhere, and currently, it appears to be in the fixed income market - specifically investment-grade corporate bonds and municipal general obligation bonds. Over the past three months, our fixed income selections have performed well and produced positive returns year to date. With no inflation in sight, we believe the fixed income market will continue to provide the highest relative returns for the foreseeable future, and have therefore raised our fixed income allocation to an all-time high for Capital Advantage, Inc. We will remain cautious yet vigilant while focusing our efforts in uncovering profit opportunities in this challenging environment.
If you have any questions or concerns, please contact us at anytime at (925) 299-1500. Otherwise, we will be following up with you throughout the quarter. We appreciate your business and confidence in us during this difficult time.
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Is Your Child Headed To College Next Fall?
By the Financial Planning Association |
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Is your child headed to college next fall? Now is the time for both of you to take a crash course on borrowing and spending...
Even if you’ve planned relatively well for your future college student’s expenses, the credit crunch and downturn in investment income for colleges has changed the game for financial aid at many schools. This means both parents and students need to approach the college financial aid scene with unprecedented caution.
Harvard University, the world’s richest school, announced in February that it was slashing 25% of its investment staff after its $36.9 billion endowment lost 22% of its value in the previous four months and could decline as much as 30% by the end of June. In two separate surveys released in January, the Commonfund Institute and TIAA-CREF, in a survey done for the National Association of College and University Business Officers, reported that college endowments fell on average 23% in the five months ended Nov. 30, 2008.
Why is this important?
It is true that endowments at schools of all sizes mostly pay for faculty and facilities, but they also provide both grants and scholarships for talented students who need them and have been under significantly more pressure to do so. When students have a tougher time finding lower-cost school financing, the demand for scholarship and grant funding goes sky-high. In many cases, students are forced down the borrowing chain to increasingly risky loan options.
The private student loan sector has also been hit by reports of questionable practices in the last two years. In December, New York Attorney General Andrew M. Cuomo reached an agreement with the College Board – the developer and administrator of the SAT and AP – to stop discounting products and services in exchange for a ranking on colleges’ preferred lenders list. The College Board will now invest $675,000 to develop a set of tools to help financial aid administrators to help students and parents compare student loan offers and identify the lowest-cost loan options.
What can you do?
One of the best starting points is talking with your Capital Advantage, Inc. financial advisor to discuss your specific planning needs for college expenses and financial aid options. The smartest thing you can do is develop an education plan while the kids are young to amass the right amount of savings for college, but it makes good sense for both parents and students to meet with their advisor before school starts to underscore the complete list of financial issues the student will face. These include:
Planning alternatives for financial aid shortfalls:
Over the past few years, colleges have not been able to offer adequate amounts of funding through Perkins, Stafford and Plus federal education loans, and private student loans through banks have closed up with the credit crunch. For students already admitted at schools for their freshman year in the fall, financial aid letters will start going out this month.
Here’s the catch – many college students get in trouble with debt because they are unaware that many for-profit companies advertising access to federal loans pull their financing from private sources that cost the borrower far more than actual federal loans would. The ability to plan for college well in advance and work with an expert to sift through proper loan alternatives can make the difference between an affordable debt load when a student graduates and potential bankruptcy.
Setting a budget as early as possible for basic expenses:
Until the student gets to school it will be tough to tell what actual expenses will be , but it won’t hurt to set a tentative budget that involves taking full account of the student’s savings, the parents’ (and possibly the grandparents’) contribution to everyday expenses and any planned income from work-study or other sources.
Start managing credit and debit cards before school starts:
The time to start managing credit and bank accounts is not freshman year. While a teenager won’t build a credit history as an authorized user on a parent’s card, it’s good to get a little practice using it under a parent’s watchful eye. When a child goes on to college, the challenge will be looking for the best credit card offer amongst many and managing that credit responsibly. This is a good opportunity for parents to discuss proper credit card usage and monitoring of a student’s credit score.
The above article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided and revised by Capital Advantage, Inc., a local member of the FPA.
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