QPRTs are recommended “where the clients do not have assets that are easily transferable out of the taxable estate, but [where] the residence comprises a good portion of value.’’

One of Simon’s clients is a doctor who has accumulated $15 million in qualified assets, plus a home in New Jersey worth $5 million that can be appraised for $4 million and a home in Florida worth $2.5 million. The physician is divorced with two sons and has a medical practice in New Jersey that is starting to slow because he is working less.  As Simon put it,  “He wants to maintain the New Jersey practice because he wants to have a purpose. As such, becoming a Florida resident is not an option.

“From a gift-giving perspective, we cannot transfer the qualified assets. The Florida property is a rental property that is bringing in excellent cash flow. He is going to have an estate subject to federal estate tax, so we want to try and preserve as much of his exemption as possible, but we would like to get the New Jersey home out of his taxable assets,’’ he said.

“The gift is valued at the fair market value of the residence, less the value of any retained interest,’’ said Simon, who noted in his book that under IRS Code section 7520, “if the retained interest has value, this value will be greater than zero, and the corresponding value is diminished.’’

Kaplan outlined a scenario that allows a client to lower gift tax costs through a QPRT: “A client establishes a seven-year qualified personal residence trust using a home worth $1 million to live in for seven years. Depending on the appraised value of the home and applicable interest rates, the gift of the remainder interest would be lower—let us say for this illustration, $700,000.

“And let us say I live well past the seven years. Say I live 20 years. Now the house will be worth $1.4 million. I have now transferred $1.4 million out of my taxable estate at a gift tax cost of $700,000. … I have also eliminated a tax on $700,000 of assets.’’

Kaplan said with the increase of the federal estate tax exemption to $5.43 million per person, “the group of people that are out there that will be subject to [the federal estate tax] is getting smaller and smaller. More people are concentrating on state death taxes,” Kaplan said.

In New Jersey, for example, the death tax exemption is $675,000.

“Where people are not going to be subject to the federal estate tax, they should not be too quick to transfer assets to avoid state death tax, where the asset has a low tax basis,” Kaplan said. “For many people, their homes are both their largest asset and an asset that also has a low tax basis. As such, it is an issue that comes up much more frequently as contrasted with people having investment accounts.’’

Kaplan offered this example: In a $4 million estate, with a home valued at $2 million and a tax basis of only $100,000, the client will not be subject to the federal estate tax, but will be subject to the New Jersey estate tax on everything above $675,000.