Sarasota's Prudential Palms Realty is teaming with a non-profit homeowner's assistance network to cover six months' worth of mortgage payments should the buyer lose his or her job.
The job loss has to occur within the first two years of the loan but if it does, the Rainy Day Foundation will partner with Prudential Palms to cover the payments.
"This program is really awesome," said Chris Harrington, Prudential Palms' chief operating officer. "We're really happy with it."
The home's seller pays the cost of enrolling the buyer in the Rainy Day Fund, which is a national group supported by builders, lenders, organizations and individuals.
In 2008 the foundation paid out over $4 million in assistance and its managers anticipate nearly $8 million in relief will be given out this year.
The Rainy Day Foundation's Web site says the nonprofit has helped thousands of people stay in their homes during its first five years.
The fund's managers say four reasons for falling behind prevail. They are:
Most homeowners spend their financial reserves required for loan approval within the first 60 days of owning the home.
A majority of low-to-moderate income homeowners do not have enough savings to survive even one financial setback.
Homeowners who get in trouble are those who do not have a budget and do not plan financially for the future.
Most homeowners add significant debt related to the home during first two years of a mortgage.
Tuesday, May 26, 2009
Monday, March 23, 2009
Toxix Mortgage Program announced
The US will today make public details of a $500bn (£343bn) plan that will incentivise investors to buy up toxic assets. The plan will offer subsidies to private investors to encourage them to buy troubled mortgages and other loans. Essentially, these subsidies are low-interest loans.
The US Treasury Secretary Timothy Geithner said the programme is essential to help the world markets recover.
The "Public-Private Investment Programme" will buy toxic mortgages, securities and loans from banks. Initially the programme will free-up $500bn but the Treasury has made it clear the fund could stretch up to $1 trillion.
He also alluded to one of the very significant hurdles to a global economic recovery: the fact that banks are unwilling to free up credit to potential investors because they are still reeling from toxic debt losses. He pointed out that the private sector would share the burden of toxic assets with the taxpayer.
Generally, the news has been well received and it's expected that the markets will react positively as further details are announced today
The US Treasury Secretary Timothy Geithner said the programme is essential to help the world markets recover.
The "Public-Private Investment Programme" will buy toxic mortgages, securities and loans from banks. Initially the programme will free-up $500bn but the Treasury has made it clear the fund could stretch up to $1 trillion.
He also alluded to one of the very significant hurdles to a global economic recovery: the fact that banks are unwilling to free up credit to potential investors because they are still reeling from toxic debt losses. He pointed out that the private sector would share the burden of toxic assets with the taxpayer.
Generally, the news has been well received and it's expected that the markets will react positively as further details are announced today
Tuesday, March 3, 2009
Real Estate Positioned for Growth
by Kenneth R. Harney
No economist has more information at his or her disposal than Federal Reserve chairman Ben Bernanke, and what he told Congress last week should be encouraging news for anyone interested in real estate: The recession that has gripped the country painfully for 18 months will "end" later this year - moving us into positive economic growth.
In the meantime, housing may be better positioned than other major industries. That's because there appears to be significant interest in the improved $8.000, nonrepayable home buyer tax credit plus a historically-favorable combination of low interest rates and rolled-back home prices.
In a new research report, the National Association of Home Builders found that affordability of houses is now at its best level in years. The association's "Housing Opportunity Index" -- which measures the percentage of homes sold in local markets around the country that are affordable to families earning area median incomes -- hit a near-record 62.4 percent in the most recent quarter for which data is available.
By contrast a year earlier, the index was at 47, meaning that less than half of households could afford to buy a median priced home. During the boom years it was even worse.
Although rising unemployment is a sobering counter-trend, the improvement in affordability may be setting the stage for a real estate rebound -- even if monthly ebbs and flows in sales look gloomy in the first quarter of the year .
Mortgage rates continue to hover in the mid-5 percent range for 30-year fixed rate loans. Fifteen year rates are at 4.7 percent.
While average prices of homes continue to decline on a national basis, according to the Federal Housing Finance Agency, dozens of local markets -- most of them ignored by widely-publicized surveys such as Standard & Poor's Case-Shiller Index -- continue to show net positive selling price performance.
According to the agency's latest quarterly survey, local markets in much of Texas registered higher prices year-to-year, along with parts of the Carolinas, the Northeast, and the Gulf states.
For example, houses selling in Austin, Texas, were up 4.4 percent over last year. In Boulder, Colorado, the average gain was 3 percent. In Houston 3.7 percent; Decatur, Alabama 6.6 percent; Kingsport-Bristol Tennessee 6.3 percent; and Syracuse, New York 3 percent.
You don't hear about these positives because these areas were lower profile during the boom, never experienced a bust, and are just not on the New York radar screens.
But they're for real, and their moderate, sensible growth patterns may be where we're headed in real estate this year.
No economist has more information at his or her disposal than Federal Reserve chairman Ben Bernanke, and what he told Congress last week should be encouraging news for anyone interested in real estate: The recession that has gripped the country painfully for 18 months will "end" later this year - moving us into positive economic growth.
In the meantime, housing may be better positioned than other major industries. That's because there appears to be significant interest in the improved $8.000, nonrepayable home buyer tax credit plus a historically-favorable combination of low interest rates and rolled-back home prices.
In a new research report, the National Association of Home Builders found that affordability of houses is now at its best level in years. The association's "Housing Opportunity Index" -- which measures the percentage of homes sold in local markets around the country that are affordable to families earning area median incomes -- hit a near-record 62.4 percent in the most recent quarter for which data is available.
By contrast a year earlier, the index was at 47, meaning that less than half of households could afford to buy a median priced home. During the boom years it was even worse.
Although rising unemployment is a sobering counter-trend, the improvement in affordability may be setting the stage for a real estate rebound -- even if monthly ebbs and flows in sales look gloomy in the first quarter of the year .
Mortgage rates continue to hover in the mid-5 percent range for 30-year fixed rate loans. Fifteen year rates are at 4.7 percent.
While average prices of homes continue to decline on a national basis, according to the Federal Housing Finance Agency, dozens of local markets -- most of them ignored by widely-publicized surveys such as Standard & Poor's Case-Shiller Index -- continue to show net positive selling price performance.
According to the agency's latest quarterly survey, local markets in much of Texas registered higher prices year-to-year, along with parts of the Carolinas, the Northeast, and the Gulf states.
For example, houses selling in Austin, Texas, were up 4.4 percent over last year. In Boulder, Colorado, the average gain was 3 percent. In Houston 3.7 percent; Decatur, Alabama 6.6 percent; Kingsport-Bristol Tennessee 6.3 percent; and Syracuse, New York 3 percent.
You don't hear about these positives because these areas were lower profile during the boom, never experienced a bust, and are just not on the New York radar screens.
But they're for real, and their moderate, sensible growth patterns may be where we're headed in real estate this year.
Monday, March 2, 2009
Selling Your Home in a Declining Market
Selling a home in a declining market starts with a proper attitude and finding the right Realtor® who is optimistic and knows the right sales techniques in this tough market. Even though most people and economists are down on the housing market (feel it is depressed, that the economic recovery isn't going to happen in the next few months, and consumer confidence is down), it doesn't mean that you can't sell your home.
The truth of the matter is many people will sell their homes between now and this summer. While many sellers and real estate agents take a reactive approach to market conditions, those sellers who take a more proactive and realistic approach to the market will be the ones who sell their homes. These are the sellers who take advantage of this market and move up to their dream home! First, be honest about appraising the condition of your home.
The key to successful selling in a 'declining market' is pricing your home at today's market value, having your home in tip-top condition and being able to work with a prospective buyer on financing needs and terms. Don't let your ego or pride get in the way when determining a price for your home. Put yourself in the buyer's shoes and walk across the street. Curb appeal to a new buyer is a very important and is many-times overlooked.
Secondly, take a leisurely walk through your home jotting down the little things you might do to spruce it up. New carpeting, a fresh coat of paint, new light fixtures, mirrors, etc., are items that will give your home more emotional appeal and does not cost too much. Put away the clutter throughout the home. Rooms free of clutter will appear bigger and the new buyer can visually 'move into' your home much easier. Remember, new buyers are not buying your furniture.
Finally, be patient. The real estate market has changed considerably since the last run-up where homes sold in hours or days. We are now experiencing a more "normal market" where homes take 90-120 days to sell. Remember, inventories are at an all-time high right now. Bank foreclosures are all around you and many buyers will have difficulty qualifying for a new loan. Lenders also have very strict guidelines now and consumer confidence is very low. Allowing for a normal marketing period will do a lot to alleviate your impatience when you have few showings of your home or a lack of offers to review.
A good Realtor® will keep you abreast of market changes, activity on your home and others in the neighborhood, while maintaining a "teamwork" concept that is paramount for a successful sale. Properties need ample time to be exposed to the public and finding the right buyer requires a good understanding of the market as well as sales values. In all honesty, there are no easy answers but one thing is for certain, even in the worst markets, there are people selling homes and taking their equity!
The truth of the matter is many people will sell their homes between now and this summer. While many sellers and real estate agents take a reactive approach to market conditions, those sellers who take a more proactive and realistic approach to the market will be the ones who sell their homes. These are the sellers who take advantage of this market and move up to their dream home! First, be honest about appraising the condition of your home.
The key to successful selling in a 'declining market' is pricing your home at today's market value, having your home in tip-top condition and being able to work with a prospective buyer on financing needs and terms. Don't let your ego or pride get in the way when determining a price for your home. Put yourself in the buyer's shoes and walk across the street. Curb appeal to a new buyer is a very important and is many-times overlooked.
Secondly, take a leisurely walk through your home jotting down the little things you might do to spruce it up. New carpeting, a fresh coat of paint, new light fixtures, mirrors, etc., are items that will give your home more emotional appeal and does not cost too much. Put away the clutter throughout the home. Rooms free of clutter will appear bigger and the new buyer can visually 'move into' your home much easier. Remember, new buyers are not buying your furniture.
Finally, be patient. The real estate market has changed considerably since the last run-up where homes sold in hours or days. We are now experiencing a more "normal market" where homes take 90-120 days to sell. Remember, inventories are at an all-time high right now. Bank foreclosures are all around you and many buyers will have difficulty qualifying for a new loan. Lenders also have very strict guidelines now and consumer confidence is very low. Allowing for a normal marketing period will do a lot to alleviate your impatience when you have few showings of your home or a lack of offers to review.
A good Realtor® will keep you abreast of market changes, activity on your home and others in the neighborhood, while maintaining a "teamwork" concept that is paramount for a successful sale. Properties need ample time to be exposed to the public and finding the right buyer requires a good understanding of the market as well as sales values. In all honesty, there are no easy answers but one thing is for certain, even in the worst markets, there are people selling homes and taking their equity!
Tuesday, November 25, 2008
Latest statistics from Sarasota Association of Realtors
Higher pending sales forecast busier season in local market
Pending sales remained above the 500 level once again in October, forecasting a stronger market for the winter real estate season in the Sarasota area. Pending sales reflect contracts executed by buyers and sellers, and current numbers indicate more closings likely in the upcoming months - a positive sign. In October 2008, 549 properties were reported pending, compared to only 446 in the same month last year.
Single family unit sales were also higher in October 2008 than in October 2007, while only a little lower than September 2008. There were 306 single family homes sold in October this year, compared to only 264 in October 2007, an increase of 16 percent. Condominium sales were weaker in October 2008, with 63 sales reported, compared to 120 in October 2007.
Another important market tracker - the absorption rate of properties on the market - is lower than last year at this time and has been steadily declining with decreasing inventories since May. Absorption rate is the number of months it would take to sell the entire remaining listed inventory in a particular category, based upon the sales for that particular month. For October 2008, the absorption rate for single family homes stood at 18.2 months, compared to 18.3 months in September 2008, and 31.7 months in October 2007. For condominiums, the absorption rate was 28.7 months in October 2008, compared to 33.5 months in September 2008, and 45.1 months in October 2007.
The single-family median sales price for the 12-month period ending October 2008 was $257,000. This compares to $310,000 for the same 12-month period ending October 2007. For condominiums, the 12-month rolling median sale price was $320,000 at the end of October 2008, and $357,000 for the 12 months ending October 2007, down about 10 percent.
"The strong pending sales in our market indicate that we should expect the winter season to remain stable and stronger than the late summer and early fall," said Helen Sosso, 2008 SAR President. "We are obviously living in historic times, particularly in respect to our national economy. But people continue to look at real estate as a safer place for their investment dollars in relation to other common investments. The stock market has obviously tumbled, and other commodities, like oil, have seen their values cut in half in only a few short months. Real estate has weathered the storm much better, and there are incredible values in our market right now. Families seeking a home as a future investment and a great place to live are still looking at Sarasota."
The current local market continues to demonstrate statistically that we have a great selection of more affordably priced housing for buyers to purchase. In addition, declining inventory levels normally indicate the market is returning to a more historical balance, which eventually leads to normal, long-term price appreciation.
Pending sales remained above the 500 level once again in October, forecasting a stronger market for the winter real estate season in the Sarasota area. Pending sales reflect contracts executed by buyers and sellers, and current numbers indicate more closings likely in the upcoming months - a positive sign. In October 2008, 549 properties were reported pending, compared to only 446 in the same month last year.
Single family unit sales were also higher in October 2008 than in October 2007, while only a little lower than September 2008. There were 306 single family homes sold in October this year, compared to only 264 in October 2007, an increase of 16 percent. Condominium sales were weaker in October 2008, with 63 sales reported, compared to 120 in October 2007.
Another important market tracker - the absorption rate of properties on the market - is lower than last year at this time and has been steadily declining with decreasing inventories since May. Absorption rate is the number of months it would take to sell the entire remaining listed inventory in a particular category, based upon the sales for that particular month. For October 2008, the absorption rate for single family homes stood at 18.2 months, compared to 18.3 months in September 2008, and 31.7 months in October 2007. For condominiums, the absorption rate was 28.7 months in October 2008, compared to 33.5 months in September 2008, and 45.1 months in October 2007.
The single-family median sales price for the 12-month period ending October 2008 was $257,000. This compares to $310,000 for the same 12-month period ending October 2007. For condominiums, the 12-month rolling median sale price was $320,000 at the end of October 2008, and $357,000 for the 12 months ending October 2007, down about 10 percent.
"The strong pending sales in our market indicate that we should expect the winter season to remain stable and stronger than the late summer and early fall," said Helen Sosso, 2008 SAR President. "We are obviously living in historic times, particularly in respect to our national economy. But people continue to look at real estate as a safer place for their investment dollars in relation to other common investments. The stock market has obviously tumbled, and other commodities, like oil, have seen their values cut in half in only a few short months. Real estate has weathered the storm much better, and there are incredible values in our market right now. Families seeking a home as a future investment and a great place to live are still looking at Sarasota."
The current local market continues to demonstrate statistically that we have a great selection of more affordably priced housing for buyers to purchase. In addition, declining inventory levels normally indicate the market is returning to a more historical balance, which eventually leads to normal, long-term price appreciation.
Tuesday, November 18, 2008
Sarasota High School no longer a school!
Keys to Sarasota High School were ceremoniously handed over to the Ringling College of Art and Design Monday morning, when officials from the college also showed off plans to house the Sarasota Museum of Art in the historic structure.
Museum president Wendy Surkis said the museum would strongly honor the history of the school, which opened in 1927. That will involve maintaining the roadside exterior and many of the original tile mosaics in the school floor.
“We have nicely married the old and the new,” Surkis said.
The back of the facility will be heavily renovated, with the addition of an auditorium, gift shop, sculpture garden and large installation galleries. The additions are being built with prominent windows.
The second floor of the building will be dominated by the museum, while the first and third floors will have classrooms, including some that will be used for art classes and can be viewed from museum windows as students make art.
Museum president Wendy Surkis said the museum would strongly honor the history of the school, which opened in 1927. That will involve maintaining the roadside exterior and many of the original tile mosaics in the school floor.
“We have nicely married the old and the new,” Surkis said.
The back of the facility will be heavily renovated, with the addition of an auditorium, gift shop, sculpture garden and large installation galleries. The additions are being built with prominent windows.
The second floor of the building will be dominated by the museum, while the first and third floors will have classrooms, including some that will be used for art classes and can be viewed from museum windows as students make art.
Monday, November 3, 2008
Is now the time to donate your Home?
Plunging real-estate values have made it an opportune time for older homeowners to give property to their children, while realizing big savings on gift and estate taxes.
They can do this by moving the home out of their estate with a so-called qualified personal residence trust, or QPRT, which allows homeowners to live in a property for many years before passing it on to their heirs. Though the trusts have been around for many years, many estate planners say now could be a good time to set one up since real-estate values have fallen dramatically in many markets.
QPRTs are one of a number of strategies that wealth advisers and estate planners are recommending as clients cope with beaten-down financial markets and a nasty real-estate landscape. The goal: Put beaten-down assets into trusts now and reap benefits from their appreciation outside of your estate. With real-estate values low, executing a QPRT now ensures your estate won’t contain a more-expensive home down the road, which could trigger a costly tax bill for your estate.
Most estate planners say activity on QPRTs remains quiet these days amid uncertainty over the direction of the estate tax and investors’ timidity in parting with assets during a bear market. But these same wealth advisers say conditions could be ripe – now and in the months ahead – for executing these trusts.
By transferring your home into a QPRT (often pronounced CUE-pert) when the value of your home is most likely at a low point, you’re effectively locking in a lower gift-tax amount when you move the home into the trust. And if interest rates move higher in the months ahead, that discount could be even greater because of the special method the Internal Revenue Service uses to compute the home’s gift-tax value.
“We’re probably heading to a time where it might be a perfect storm” of market conditions that make it the time to set up a QPRT, says Janine Racanelli, head of the Advice Lab at J.P. Morgan Chase & Co.
Henry “Terry” Christensen III, a lawyer at McDermott Will & Emery LLP, says his firm executed about 50 percent more QPRTs earlier this year than it did two years ago. Mr. Christensen says that the trusts are especially popular in California and Florida, where home prices have dropped the most.
Here’s how a QPRT works: Say you’re 60 years old and own a $1 million home. You’d like to leave the home to your children, but worry the property could jack up the value of your estate, perhaps pushing it high enough to trigger the estate tax. (The basic federal estate-tax exemption is $2 million per person for 2008, with the top estate-tax rate at 45 percent.)
To move the asset out of your estate, you can put the home into a QPRT for a term of 10 years (terms can be longer or shorter, depending on your situation). For those 10 years, your living arrangements don’t change – you live in the home and pay all the expenses, including property taxes.
Because you’ve given the home to a QPRT, you’ll have to file a gift-tax return that year, but you stand to benefit from a complex IRS formula that actually discounts your gift amount when you move the home into the trust. Assuming that value doesn’t push you over your $1 million lifetime gift-tax exemption, you won’t have to pay taxes at all.
The formula, among other things, considers your age, the IRS’s current applicable federal rate of 3.8 percent, which is the federal interest rate used to set up trusts or loans to relatives, and the 10-year length of the trust. Assuming your home appreciates 4 percent a year, the formula can nearly halve the value of your house for gift-tax purposes.
After 10 years, the home transfers to your beneficiaries, usually your children. At this point, they own the home, and it’s outside your estate and won’t be subjected to estate taxes. In this example, when the QPRT expires, your home is worth nearly $1.5 million. Assuming you live well into your 70s or 80s, it’s likely to be worth even more.
If you wish to remain in the home, you’ll have to pay fair-market rent to your kids, or risk running afoul of the IRS, which could scrutinize your children for allowing rent-free use of the property. When you die, your children keep the house and don’t have to pay inheritance taxes.
In 1986, Tom and Margie Williams of Columbus, Ohio, bought a lakeside cottage on Walloon Lake in Petoskey, Mich., near the northern tip of the state. Over the years, the couple and their three daughters spent summers there and used the spot for Christmas reunions. The home also had some historical value: Built in 1875, it stands in a lakeside community where Ernest Hemingway spent time as a child.
As the Williamses entered their 60s, they sought estate-planning advice, determined to keep a property near and dear to them in the family without burdening their children with a bigger estate-tax bill.
In 1996, the couple turned the $300,000 home over to a QPRT for a 10-year term. At the time, the applicable federal rate was 7.6 percent. The value of the cottage for gift-tax purposes was only about $120,000. The couple were nowhere near exceeding their lifetime $1 million gift-tax exemption, so they didn’t have to pay taxes on the transfer.
In 2006, the home passed to their children, who now collect rent from the couple in exchange for their right to use the home. “I always tell Margie, ‘Check with the landlord,’“ when something goes wrong, says the 73-year-old Mr. Williams.
The Williamses passed more money to their daughters through other maneuvers in the hope that they’ll maintain the home for years to come. “They’ve kept it this long,” says Margie Williams, “and they won’t have to pay the inheritance taxes.”
These trusts have some quirks. If you die before the trust term expires, the home reverts to your estate, nullifying any potential estate-tax savings. Because of this rule, it’s essential to take stock of your age and health when drawing up the trust.
Also remember that a QPRT is an irrevocable trust, meaning you have to give up the home when the term ends. That type of planning can be tricky - it’s sometimes hard to predict what your relationship with your children will be one or two decades down the line, and there’s no guarantee your beneficiaries will let you stay in the house.
Of course, a QPRT makes sense only if you anticipate your assets will exceed the estate-tax exemption when you die. In 2009, that exemption jumps to $3.5 million.
The tax is set to vanish in 2010, and then return in 2011 with a lower $1 million exemption and a 55 percent top rate. But most estate planners are betting Congress will revise the current structure. Both presidential candidates want to keep the estate tax, though with different exemptions and tax rates.
In addition to uncertainty surrounding the estate tax, some estate planners discourage QPRTs at times like these, when interest rates, including the applicable federal rate, are low. That’s because you get a greater discount on your gift-tax value when the rate is higher. But other advisers tell clients not to focus too much on the rate, especially if your home’s value has declined significantly in the past year or two.
“I think the idea that they’re only attractive when interest rates are high is just a myth,” says Natalie Choate, a Boston estate-planning lawyer and author of a widely used book on QPRTs. “If you wait until interest rates are high, it may be too late because of your health or because the house has appreciated dramatically.”
They can do this by moving the home out of their estate with a so-called qualified personal residence trust, or QPRT, which allows homeowners to live in a property for many years before passing it on to their heirs. Though the trusts have been around for many years, many estate planners say now could be a good time to set one up since real-estate values have fallen dramatically in many markets.
QPRTs are one of a number of strategies that wealth advisers and estate planners are recommending as clients cope with beaten-down financial markets and a nasty real-estate landscape. The goal: Put beaten-down assets into trusts now and reap benefits from their appreciation outside of your estate. With real-estate values low, executing a QPRT now ensures your estate won’t contain a more-expensive home down the road, which could trigger a costly tax bill for your estate.
Most estate planners say activity on QPRTs remains quiet these days amid uncertainty over the direction of the estate tax and investors’ timidity in parting with assets during a bear market. But these same wealth advisers say conditions could be ripe – now and in the months ahead – for executing these trusts.
By transferring your home into a QPRT (often pronounced CUE-pert) when the value of your home is most likely at a low point, you’re effectively locking in a lower gift-tax amount when you move the home into the trust. And if interest rates move higher in the months ahead, that discount could be even greater because of the special method the Internal Revenue Service uses to compute the home’s gift-tax value.
“We’re probably heading to a time where it might be a perfect storm” of market conditions that make it the time to set up a QPRT, says Janine Racanelli, head of the Advice Lab at J.P. Morgan Chase & Co.
Henry “Terry” Christensen III, a lawyer at McDermott Will & Emery LLP, says his firm executed about 50 percent more QPRTs earlier this year than it did two years ago. Mr. Christensen says that the trusts are especially popular in California and Florida, where home prices have dropped the most.
Here’s how a QPRT works: Say you’re 60 years old and own a $1 million home. You’d like to leave the home to your children, but worry the property could jack up the value of your estate, perhaps pushing it high enough to trigger the estate tax. (The basic federal estate-tax exemption is $2 million per person for 2008, with the top estate-tax rate at 45 percent.)
To move the asset out of your estate, you can put the home into a QPRT for a term of 10 years (terms can be longer or shorter, depending on your situation). For those 10 years, your living arrangements don’t change – you live in the home and pay all the expenses, including property taxes.
Because you’ve given the home to a QPRT, you’ll have to file a gift-tax return that year, but you stand to benefit from a complex IRS formula that actually discounts your gift amount when you move the home into the trust. Assuming that value doesn’t push you over your $1 million lifetime gift-tax exemption, you won’t have to pay taxes at all.
The formula, among other things, considers your age, the IRS’s current applicable federal rate of 3.8 percent, which is the federal interest rate used to set up trusts or loans to relatives, and the 10-year length of the trust. Assuming your home appreciates 4 percent a year, the formula can nearly halve the value of your house for gift-tax purposes.
After 10 years, the home transfers to your beneficiaries, usually your children. At this point, they own the home, and it’s outside your estate and won’t be subjected to estate taxes. In this example, when the QPRT expires, your home is worth nearly $1.5 million. Assuming you live well into your 70s or 80s, it’s likely to be worth even more.
If you wish to remain in the home, you’ll have to pay fair-market rent to your kids, or risk running afoul of the IRS, which could scrutinize your children for allowing rent-free use of the property. When you die, your children keep the house and don’t have to pay inheritance taxes.
In 1986, Tom and Margie Williams of Columbus, Ohio, bought a lakeside cottage on Walloon Lake in Petoskey, Mich., near the northern tip of the state. Over the years, the couple and their three daughters spent summers there and used the spot for Christmas reunions. The home also had some historical value: Built in 1875, it stands in a lakeside community where Ernest Hemingway spent time as a child.
As the Williamses entered their 60s, they sought estate-planning advice, determined to keep a property near and dear to them in the family without burdening their children with a bigger estate-tax bill.
In 1996, the couple turned the $300,000 home over to a QPRT for a 10-year term. At the time, the applicable federal rate was 7.6 percent. The value of the cottage for gift-tax purposes was only about $120,000. The couple were nowhere near exceeding their lifetime $1 million gift-tax exemption, so they didn’t have to pay taxes on the transfer.
In 2006, the home passed to their children, who now collect rent from the couple in exchange for their right to use the home. “I always tell Margie, ‘Check with the landlord,’“ when something goes wrong, says the 73-year-old Mr. Williams.
The Williamses passed more money to their daughters through other maneuvers in the hope that they’ll maintain the home for years to come. “They’ve kept it this long,” says Margie Williams, “and they won’t have to pay the inheritance taxes.”
These trusts have some quirks. If you die before the trust term expires, the home reverts to your estate, nullifying any potential estate-tax savings. Because of this rule, it’s essential to take stock of your age and health when drawing up the trust.
Also remember that a QPRT is an irrevocable trust, meaning you have to give up the home when the term ends. That type of planning can be tricky - it’s sometimes hard to predict what your relationship with your children will be one or two decades down the line, and there’s no guarantee your beneficiaries will let you stay in the house.
Of course, a QPRT makes sense only if you anticipate your assets will exceed the estate-tax exemption when you die. In 2009, that exemption jumps to $3.5 million.
The tax is set to vanish in 2010, and then return in 2011 with a lower $1 million exemption and a 55 percent top rate. But most estate planners are betting Congress will revise the current structure. Both presidential candidates want to keep the estate tax, though with different exemptions and tax rates.
In addition to uncertainty surrounding the estate tax, some estate planners discourage QPRTs at times like these, when interest rates, including the applicable federal rate, are low. That’s because you get a greater discount on your gift-tax value when the rate is higher. But other advisers tell clients not to focus too much on the rate, especially if your home’s value has declined significantly in the past year or two.
“I think the idea that they’re only attractive when interest rates are high is just a myth,” says Natalie Choate, a Boston estate-planning lawyer and author of a widely used book on QPRTs. “If you wait until interest rates are high, it may be too late because of your health or because the house has appreciated dramatically.”
Subscribe to:
Posts (Atom)
