The Thursday Report 8.30.2012
Providing updates and comments on Florida estate planning
and creditor protection developments and insight
for lawyers, CPAs, and other planning professionals
1. MAKING THE MOST OF AN AMERICAN EXPRESS PLATINUM CARD
2. WHAT YOU NEED TO KNOW ABOUT QUALIFIED PERSONAL RESIDENCE TRUSTS
Welcome to this week’s Thursday Report, in which we first express our gratitude that Hurricane Isaac was not nearly as terrible as it could have been. Secondly, we thank all law enforcement and state infrastructure personnel for everything that they have done to prepare for the Hurricane as well as the sacrifices that they have made to facilitate the Republican National Convention in Tampa.
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If You Have an American Express Platinum Card, the Chances Are That You Are Not Aware of the Many Opportunities These Offer
If you don’t have an American Express Platinum card, you may consider getting one after learning about the various features and concierge service benefits offered by these cards, which are described in our Memorandum that you can view by clicking here.
American Express Platinum cards offer substantial benefits that many people may not be aware of, including a free additional “Airport Lounge Pass” that provides access to dozens of airport lounges that the platinum card itself does not provide, a $200 credit for extra luggage and in-flight expenses for one chosen airline, priority check-in and automatic upgrade rights with 3 rental car companies just for asking, double points on international air travel, and much more, as described further for those who click here.
What You Need to Know about Qualified Personal Residence Trusts by Kenneth J. Crotty, J.D., LL.M. and Alan S. Gassman, J.D., LL.M,
Many taxpayers establish Qualified Personal Residence Trusts (QPRTs) to make effective use of what remains of their $5,120,000 gift tax exemptions this year. With real estate values solidifying and the excess supply of vacant homes and condominiums decreasing, many affluent clients conclude that establishing a QPRT is an excellent opportunity to substantially reduce potential estate tax liability and utilize their remaining gift tax exemption.
A QPRT is an irrevocable trust established by the owner of a residence by transferring title to his or her primary or secondary residence to the trust. The trust terms provide that the previous owner of the residence (the “Grantor”) will continue to have the right to use and occupy the residence for a term of years specified by the Grantor. Once the given term has passed, the trust provides that ownership of the personal residence will pass to remainder beneficiaries. If the Grantor wishes to continue living in the home after the initial term specified in the trust agreement, the Grantor must pay a fair market rent to the remainder beneficiaries.
The Tricks
Using present low values and the supportive evidence of low tax assessed values along with the reduction of gift value by the actuarial tables that give credit for the retained use term, QPRTs are a real bargain for many clients.
If each spouse transfers one-half (1/2) of a residence into a separate QPRT, an additional discount can be taken, and one spouse can have free lifetime use of one-half (1/2) of the home.
The following example demonstrates the tax benefits of a QPRT for a married couple. Spouses who are 55 years old with a house worth $3,500,000 could each transfer 50% of the residence to separate QPRTs. Assuming a 15% reduction in fair market value due to co-ownership, a one-half interest in the home would be valued at $1,487,500. If the clients retain the right to live in the residence for twelve years, then each client would be making a taxable gift of $1,222,408 when the QPRT is funded. Assuming a 35% estate tax rate and a 7% growth rate on the residence, the QPRT would generate an estate tax savings of $986,625 after the twelve-year term, so long as one spouse survived. Based on these assumptions, the estate tax savings would be approximately $1,977,339 after 20 years.
A letter that we use to explain QPRTs to married couples can be reviewed by clicking here and a spreadsheet that can be reviewed can be found by clicking here. We will be glad to send you the spreadsheet as an Excel document if you request.
The Traps
- The client must survive the retained term to obtain the estate tax benefit, but even if he or she dies during the retained term, the estate will receive a credit for any gift exemption that was used or any gift tax that was paid when the QPRT was set up. As a result, the estate tax consequences will be no worse than if the QPRT had not been created. If the client does not survive the retained term, the assets of the QPRT will be included in the client’s gross estate for estate tax purposes.
- It is important to include trust language that will protect the trust assets from the Grantor’s creditors. If the QPRT is properly drafted, the assets held in trust should be protected from the Grantor’s creditors, even if the residence is sold or damaged.
Under Treasury Regulation Section 25.2702-5, a trust ceases to qualify as a QPRT if one of the following occurs: 1) the Grantor no longer uses the residence as a personal residence; 2) the residence is sold and the proceeds are not reinvested; or 3) the residence suffers damage or destruction that renders it unusable.
Treasury Regulation Section 25.2702-5(c)(8) requires the QPRT to contain certain provisions. Under this regulation, the QPRT must specify that within thirty days of ceasing to qualify as a QPRT, the trustee must either: 1) distribute the assets outright to the Grantor; or 2) convert the assets to a separate trust that meets the requirements of a qualified annuity trust for the benefit of the Grantor.
Although the regulation permits the assets either to be distributed outright to the grantor or to be converted to an annuity, it is strongly recommended that all trust documents are drafted to require conversion to an annuity interest. Under this option, the trust will make an annual annuity payment to the Grantor, which, if properly drafted, should qualify as an exempt asset under Florida Statute Section 222.14. This annuity would terminate at the end of the retained term, and the remaining proceeds would be transferred to the remainder beneficiaries of the trust.
We draft our QPRTs to require that the assets be converted to a qualified annuity interest with the intention of qualifying the annuity as a creditor-exempt asset under Florida Statute Section 222.14. Sample language that we have used in a QPRT to facilitate this process is as follows:
If the Trust ceases to be a Qualified Personal Residence Trust with respect to certain property, such property shall, within thirty days, be held in a separate share and the interest of the Grantor shall be converted into a qualified annuity interest (as defined by Treas. Reg. § 25.2702-3 and the requirements for such interest shall be deemed incorporated into this Article) with the smallest fixed annuity payments permitted by Treas. Reg. § 25.2702-5(c)(8)(ii)(C) to be made to the Grantor each calendar month for the balance of the Retained Possession Term, provided that the Trustee is authorized to make the conversion at an earlier time. The commencement date of the qualified annuity interest shall be determined in accordance with Treas. Reg. § 25.2702-5(c)(8)(ii)(B), and the Trustee may defer and determine the payment of any annuity amount as provided in that Regulation. If the Trust ceases to be a Qualified Personal Residence Trust with respect to certain property, the intent of the Grantor is to provide for issuance of an annuity contract to the Grantor based on the terms of this Agreement.
We co-authored a Florida Bar Journal Article, which discusses whether an annuity received from a trust will qualify as a creditor-exempt asset under Florida Section 222.14. This article can be accessed by clicking here.
NEWS AND UPCOMING EVENTS
Our Bloomberg BNA webinar on Florida Law for the Estate Planner was “rained out” by Hurricane Isaac, but the 149 page PowerPoint that we prepared for this is available upon request by emailing Janine@gassmanpa.com
September 20, 2012 – We are providing a private physician creditor protection presentation for selected SunTrust clients in Tampa. The PowerPoint for this presentation is available upon request by emailing Janine@gassmanpa.com.
September 27, 2012, 4:00 p.m. – 4:50 p.m. Please join us for The 4-4-4 Show, a monthly Clearwater Bar Association continuing education webinar series that qualifies for 1 hour of continuing education credit. This month’s topic is “Florida LLC and Limited Partnership Law and Strategies Update” with well known expert Tom Wells, Esquire of Coral Gables, Florida. To register please visit: www.clearwaterbar.org
For details about each event, please visit us online at gassmanlaw.com/newsandevents.html
Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is ken@gassmanpa.com.
Thank you to our law clerks who assisted us in preparing this report:
Allison Wallrapp graduated summa cum laude from Rollins College and is currently a third-year student at Stetson University College of Law. Allison serves as a representative in the Student Bar Association and is on the executive board of Stetson Republicans. Her interests in the law include business law, employment law, and taxation. Her email address is Allison@gassmanpa.com.
Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.
Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and is currently seeking admission to the Florida Bar. She wants to pursue a career in Business, Employment, and Property law.