Keep Liquidity By Transferring Your Home to An Intentionally Defective Grantor Trust

As I have previously mentioned, estate taxprovisions allowing for a $5 million exemption are set to expire at the end ofthis year.  Now is the chance forwealthy families to transfer assets with little to no federal gift tax.  Many wealthy people have already takenadvantage of this opportunity, but some clients lack liquidity to do so.  Much of their wealth is tied up inbusiness, real estate, venture capital, and/or personal residences. 

Rob Clarfeld, a wealth strategist, has arecommendation for how clients can still take advantage of the opportunity thatremains this year without impinging upon liquidity of their estate.  Rob recommends gifting one’s personalresidence to an intentionally defective grantor trust (IDGT).  This can be an ideal way to remove theasset and the future appreciation from one’s estate while still remaining inthe residence as a tenant.  Thesteps to make such a transfer are as follows:

1. Set up an IDGT, which allows one to removetransferred assets from your estate for estate and gift tax purposes, but notfor income tax purposes.   

2. Get an appraisal of the fair market value of theresidence.

3. Transfer the residence to the trust.

4.  Thetrustee is then responsible for collecting rent and paying the expenses of theresidence.

There are numerous benefits to making this transfer.  The rental income will not be taxed, and realestate taxes or mortgage interest deductions flow through to the grantor’s taxreturns.  Furthermore, if therental payments are consistent with the residence’s fair market rental value,they are also gift-tax free.  Anyrental income that the trust accumulates in excess of its expenses is considered tax-freeadditions. 

See Rob Clarfeld, ReduceEstate Taxes Without Reducing Your Liquidity, Forbes, Sept. 4,2012.   

Special thanks to Jim Hillhouse (Professional LegalMarketing (PLM, Inc.)) for bringing this article to my attention.