Estate planning with a personal residence.

• Author: Mikuta, Richard J.

In many situations, to minimize estate taxes, practitioners often recommend the use of annual exclusion gifts and/or taxable gifts in an amount below or equal to the client's unified credit equivalent amount (currently $600,000). At times this suggestion is met with some reluctance; the client may not wish to give away income-producing assets (especially liquid assets) due to the adverse impact the gifts would have on the client's future cash flow and the availability of assets for the client's use. It is under this type of scenario that the tax adviser should consider recommending to the client that the gifts be made with nonincome-producing (and illiquid) assets such as real estate (e.g., the client's residence). Recently, however, many creative estate planning techniques for intrafamily transfers of real estate have been legislatively or judicially eliminated, or severely restricted-mainly by the enactment of Chapter 14 of the Code and the Gradow decision, 897 F2d 516 (Fed. Cir. 1990). However, estate planning techniques still exist for intrafamily transfers of real estate, especially with regard to a client's residence.

Outright gift

When considering the transfer of a personal residence, an individual may be concerned with the retention of its control. Oftentimes the desire to retain control of the residence outweighs the estate tax savings available, thereby making the outright transfer of a residence not a desirable alternative. In this type of situation, the practitioner needs to advise the client of a way to transfer the residence to achieve estate tax savings, while at the same time allowing the client to retain sufficient control of the residence.

If a client decides to make an outright gift of a partial (minority) interest in a residence, in most states it is advisable for the client to execute a waiver of partition before the transfer. A waiver of partition prevents the transferees from selling their interest in the property unless all parties with interests in the property agree to do so. The waiver of partition also supports the application of the minority interest discount. Without the execution of a waiver of partition, the IRS may be able to disallow any discount taken, by making the argument that each interest transferred was a severable interest that could be independently sold for a price equal to the interest's pro rata share of the property's fair market value (FMV).

Residence trusts

The Revenue Reconciliation Act of 1990 added new special valuation rules under Sec. 2702 applicable to estate freeze techniques involving trusts i.e., grant r retained income trusts grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs)). The enactment of this section significantly diminished the use of these vehicles for estate planning purposes. However, contained within Sec. 2702 and Regs. Sec. 25.2702-5 are special provisions that allow a GRIT to be used to transfer a personal residence" between family members. The exception applies only if the trust qualifies either as a personal residence trust...