July 14, 2014
Authored by: Stacie J. Rottenstreich and Karin Barkhorn
While constant attention is being given to Hillary Clinton’s potential decision to run for the presidency in 2016 and the release of her latest book, Hard Choices, last month, news sources recently reported that she and former President Bill Clinton have taken advantage of several of the estate planning techniques recommended by trusts and estates attorneys for high net worth individuals.
This is interesting, in part, because the Clintons support the estate tax and have not been in support of its repeal.
According to reported sources, each of the Clintons created a qualified personal residence trust and each contributed his or her 50% ownership interest in their Chappaqua, New York house to his or her respective trust. A qualified personal residence trust, commonly called by its acronym QPRT, is an IRS sanctioned estate planning technique. The creator of the trust places a residence or interest in a residence in the trust, retains the right to live in the trust for a term of years, and after the term the trust asset or the residence passes to a beneficiary.
The Internal Revenue Code has special rules which help calculate the value of the “gift” made by the creator to the QPRT. The gift portion, which could offset some of the $5,340,000 exemption allotted to individuals in 2014 is not the entire value of the residence, but the value of the residence when transferred reduced by the value of the retained use by the creator for the trust term.
By having each of the Clintons create a separate QPRT with only a 50% interest in the residence, the value of such interest may also be eligible for a discount for owning less than a majority interest.
In order for a QPRT to work, the creator of the trust must outlive the trust term. But for a relatively healthy individual, it is quite likely for this to happen.
When the trust term is over, the creator no longer owns any interest in the residence and the remainder beneficiary, likely daughter Chelsea in the Clintons’ case, owns it. If the creator wants to continue to live in or use the residence, he or she would have to pay rent. The residence might stay in continuing trust after the trust term ends for the benefit of the remainderman. This trust could be structured as a “grantor trust”. This is an additional estate planning help, as, in a well drafted the QPRT, the rent paid would not be taxable income. In essence, the continuing rent payments are tax-free gifts to the QPRT beneficiary.
If each of the Clintons outlives the term of the respective QPRTS, the entire value of the Chappaqua house, including the appreciation from the date the QPRTS were created, will be free from estate tax. Neither Clinton will own any interest in the house to be taxed. The Clintons may both be in favor of an estate tax, yet they seem to be willing to do what they can to estate plan, and reduce the size of their estates at death.