An elderly client has $12 million in two homes she wants her children to inherit. How to make that happen without exposing the kids to estate taxes that could oblige them to sell?
Lisa Osofsky, a CPA and financial planner at WeiserMazars in New York, recently advised an 85-year-old woman and her family on just such an estate plan.
The houses in question are a co-op in Manhattan valued at about $8 million, and a home in the Hamptons beach resort area of Long Island worth $4 million.
Osofsky recommended a three-pronged strategy to reduce taxes and provide cash for taxes that could not be avoided.
Step one called for the woman to contribute her Hamptons house to a family limited partnership, then distribute a limited interest in the partnership to each family member or to a trust.
This arrangement prevents future home appreciation from being subject to estate taxes, since a large part of the home's value will be transferred outside of her estate to the kids. It still gives the mother the use of the house.
Step two involved transferring the co-op out of the woman's estate into a qualified personal residence trust, or QPRT. This allows the client to continue using the home for an established number of years, after which she would pay rent to the family. A QPRT also enables the home to be transferred at a reduced value for gift tax purposes and prevents its future appreciation from being subject to estate taxes.
These first two moves would significantly reduce the family's estate tax burden, but it still needed help coming up with money to pay whatever estate taxes remained. One obvious option was to sell the co-op, but the family did not want to be forced to do that.
Thus Osofsky's step three: Leverage the equity of the homes. It is not possible to take out a mortgage on a property in a QPRT, so she advised her client to refinance her mortgage on the Hamptons home. "They can take that money and invest it someplace safe … That allows them to secure liquidity."
The family is working out the logistics before proceeding with Osofsky's plan.
But, she says, they are glad to have a plan that allows them to preserve their mother's quality of life, keep their cherished home and prepare for inevitable tax obligations.
