How do I unwind my QPRT?

Given the state of the economy, it's not uncommon for real estate that has been transferred to a qualified personal residence trust (QPRT) to have experienced less than anticipated appreciation or even depreciation. Consequently, one of the purposes of the QPRT--removing future appreciation from an estate--may go unachieved. Some grantors in this position may be inclined to "unwind" (undo) the QPRT. That, however, may not be the best option.

If you unwind the QPRT, you will have wasted any payment of federal gift tax or gift tax exemption that you may have used on the original transaction. For example, say you transferred your primary residence valued at $500,000 to a QPRT with a 20-year term when you were 40 years old and the Section 7520 rate was 4%. You made a gift of approximately $205,000, and you either paid gift tax on that amount or you used up $205,000 of your $1 million gift tax exemption. Either way, you will have squandered that amount because you won't get that back when you unwind the QPRT.

You may be better off keeping the QPRT. Even if there will be zero appreciation in the property, you might still enjoy some tax savings if you let the QPRT continue. That's because when the IRS values the gift, it assumes there will be no appreciation in the property; plus, it gives you a discount because there's a chance you may die during the trust term. So, if you outlive the trust term, you will still enjoy the benefit of that discount.

Not only that, but when the QPRT terminates, you will have to pay the remainder beneficiaries

fair market rent. These payments will reduce your estate even further.

That said, if you still want to unwind the QPRT, your best option may be to invalidate the QPRT by ceasing to use your home as a primary residence (a requirement for a valid QPRT).

How? Sell the home or rent it out.

Items Worth Noting

Special rules apply to charitable donations for Haiti relief efforts

If you make a qualified charitable contribution after January 11, 2010, and before March 1, 2010, for relief efforts associated with the January 12, 2010, earthquake in Haiti, you can treat the contribution as if it were made on December 31, 2009. As a result, if you itemize deductions on Form 1040, Schedule A, you can elect to claim the deduction for the Haitian relief contribution on your 2009 federal income tax return. To qualify, the contribution must be made in cash. To facilitate charitable donations made via text messages, a telephone bill showing the name of the organization, and the date and amount of the contribution, will satisfy charitable deduction recordkeeping requirements.

Time running out for first-time homebuyer's tax credit

If you're in the market for a new home and hope to take advantage of the first-time homebuyer tax credit, you'll need to purchase a principal residence before May 1, 2010 (or before July 1, 2010 if you enter into a written binding contract prior to May 1, 2010). If you--and your spouse, if you're married--did not own any other principal residence during the three-year period ending on the date of purchase, the credit is worth up to $8,000 ($4,000 if you're married and file separate returns). If you--and your spouse, if you're married--have maintained the same principal residence for at least five consecutive years in the eight-year period ending at the time you purchase a new principal residence, the credit is worth up to $6,500 ($3,250 if you're married and file separate returns).

The credit is reduced if your modified adjusted gross income (MAGI) exceeds $125,000 ($225,000 if married filing a joint return) and is completely eliminated if your MAGI reaches $145,000 ($245,000 if married filing a joint return). You can't claim the first-time homebuyer tax credit if the purchase price of your principal residence exceeds $800,000. Other limitations and provisions also apply.

President's proposed 2011 budget offers Congress multiple initiatives

The proposed 2011 budget submitted by President Obama offers multiple new initiatives, including several small business tax incentives, provisions intended to promote college affordability, and tax benefits targeting the middle class. The budget that ultimately emerges from Congress will likely differ significantly from that proposed by the President, but the proposed budget is valuable in that it provides a framework for discussion over the next few months. The proposed budget includes:

For businesses-- A new tax credit of $5,000 for each new hire made by an employer, a one-year extension of 2009 bonus depreciation and Section 179 expensing limits, and requirements for employers who do not offer retirement plans to implement automatic IRAs for employees

For students-- Expanded Pell Grant limits, a permanent American Opportunity tax credit, and a proposal to strengthen income-based repayment plans for student loans (overburdened borrowers would pay only 10% of discretionary income in loan payments and remaining debt would be forgiven after 20 years)

For individual taxpayers-- A return of the top two marginal tax rates to 39.6% and 36% in 2011, and an expanded 28% tax bracket; a permanent extension of the current 0% and 15% rates on long-term capital gain, with a new 20% rate for higher-income individuals; permanent extension of the federal estate tax and the alternative minimum tax (AMT) rules and exemption amounts, at 2009 levels

New credit card provisions effective this week

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 included several provisions that became effective on February 22, 2010. Some of these changes could affect you:

Credit card companies are prohibited from increasing annual percentage rates (APRs) that apply to existing balances unless (1) the index on which the rate is based changes, (2) the APR was a promotional rate that has expired, (3) you failed to comply with a hardship workout plan, or (4) you're more than 60 days past due on the account; if an increase in APR is the result of you falling 60 days past due on the account, the rate will be restored to what it was before the increase if you make timely minimum payments for six months
If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR

If you're under age 21, you won't be able to get credit unless you have a cosigner over age 21 or can demonstrate an ability to repay the debt

You can't be charged an over-the-limit fee unless you authorize the credit card company to complete the transaction that causes the balance to exceed your credit limit

New Rules for First-Time Homebuyer Tax Credit

In July 2008, the Housing and Economic Recovery Act established a temporary refundable first-time homebuyer tax credit equal to 10% of the purchase price of a principal residence, up to $7,500 ($3,750 if married filing separately). The credit applied to first-time homebuyers who purchased a home on or after April 9, 2008, and before July 1, 2009. Generally, you qualified as a first-time homebuyer if you, and your spouse if you were married, did not own any other principal residence during the 3-year period ending on the date of purchase. The credit was phased out for individuals with higher incomes, and had to be paid back over 15 years in equal installments (repayment would be accelerated if the home were to be sold during the 15-year period or if the home ceased to be the principal residence of you or your spouse during that time).

In February 2009, the American Recovery and Reinvestment Act of 2009 extended the credit to homes purchased by qualified first-time homebuyers through November 30, 2009. The new legislation also expanded the credit. The credit remained 10% of the purchase price of the home, but the dollar limit increased to $8,000 (half that amount for married individuals filing separate returns) for home purchases made after December 31, 2008, and before December 1, 2009. In addition, for a home purchased in 2009, there was no requirement to pay back the credit over time, provided the home remained the principal residence of the homebuyer for 36 months.

New legislation

On November 6, 2009, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009. The Act extends the first-time homebuyer tax credit to principal residences purchased before May 1, 2010. (If you purchase a principal residence before July 1, 2010, you can still qualify for the credit provided that you enter into a written binding contract prior to May 1, 2010.)

The new legislation also makes a number of changes, effective for purchases made after November 6, 2009:

Higher income limits now apply. The credit is reduced if your modified adjusted gross income (MAGI) exceeds $125,000 ($225,000 if married filing a joint return) and is completely eliminated if your MAGI reaches $145,000 ($245,000 if married filing a joint return).
You can't claim the first-time homebuyer tax credit if the purchase price of your principal residence exceeds $800,000.
You may qualify for the credit even if you're not a first-time homebuyer. The new legislation allows some existing homeowners to qualify for the credit when they purchase a new principal residence. If you (and your spouse, if you're married) have maintained the same principal residence for at least 5 consecutive years in the 8-year period ending at the time you purchase a new principal residence, you could qualify for a credit of up to $6,500 ($3,250 if you're married and file separately).
If you purchase a qualifying principal residence in 2009, you can elect to treat the purchase as if it were made on December 31, 2008--allowing you to claim the credit on your 2008 federal income tax return. If you purchase a qualifying principal residence in 2010, you can elect to treat it as if the purchase occurred on December 31, 2009.

Additional limitations and provisions

The new legislation also includes additional limitations on the credit, effective for purchases made after November 6, 2009. You can't claim the credit unless you (or your spouse, if you're married) are 18 years of age. You also can't claim the credit if you purchase your principal residence from someone who is related to you or your spouse, or if you can be claimed by someone else as a dependent. The legislation also imposes new documentation requirements.

Special rules are established for members of the uniformed services and others who receive government orders for qualified official extended duty service.

Estate Tax Update!

The federal estate tax is dead--at least for now.

It's 2010, and the temporary, one-year repeal of the federal estate tax is in effect. The failure of Congress to either extend the 2009 estate tax rules into 2010 or enact a permanent estate tax law has created several unfortunate consequences. Here are some things you need to know to protect your family and your assets.

Facts

• Both the federal estate tax and the federal generation-skipping transfer tax (a separate tax on property given to grandchildren, great-grandchildren, etc.) are repealed for 2010 (unless Congress enacts legislation to reinstate them, retroactive to January 1, 2010 or otherwise).
• Both taxes are scheduled to return in 2011 at levels that applied prior to 2001; that means a $1 million exemption and a top tax rate of 55% (in 2009, the exemption was $3.5 million and the top rate was 45%).
• The federal gift tax remains in effect with a $1 million lifetime exemption, and the top tax rate is 35%.
• The step-up in basis rule that allowed heirs to inherit property with a fair market value as of the date of death of the decedent has been modified. For 2010, the basis for inherited property is the lesser of the decedent's basis (carryover basis) or its fair market value on the date of death. But, $1.3 million of estate property is afforded a step-up in basis, and up to $3 million of property passing to a surviving spouse receives a step-up as well.
  

What's next?
It's anyone's guess what Congress will do next. Some believe quick action will reinstate the taxes at 2009 levels (see above). Others believe Congress will proceed cautiously in an attempt to enact serious reform. In either case, any reinstated tax may or may not be made retroactive to January 1, 2010. Needless to say, planning under these circumstances is challenging, at best.

The fallout
If your estate plan assumed that an estate tax would be imposed in 2010, it may no longer carry out your intentions; it may not provide adequately for your spouse, and it may not meet your overall tax objectives. Here are some steps you may want to take.

• See your estate planning attorney about the possible need to revise your will, trust, and other estate planning documents, especially if they include formula clauses. A formula clause expresses certain bequests in terms of fractions or percentages in order to eliminate or reduce estate taxes. You may also need to see your estate planning attorney about these documents if you live in a state that imposes its own estate and/or inheritance tax, or if your documents include multi-generational planning.
• Organize your records and get your parents/grandparents to organize theirs. The modified carryover basis rules impose strict reporting requirements, including supporting documentation and penalties for noncompliance.