Alaska Qualified Personal Residence Trusts
SAVE ESTATE TAXES
Asset Protection For Your Residence
An Alaska qualified personal residence trust is an excellent way to dramatically reduce your federal estate tax, and also provide full asset protection for your Alaska residence.
For example, let us assume that you own, in your individual name, an Alaska residence with a fair market value of $400,000. Assume you are 60 years of age and that the residence appreciates 4% per year until your death at age 81 [your actuarial life expectancy].
Estate Taxes. Without using a residence trust, at the date of death (81), the residence will be worth $925,253. At today’s estate tax rate (45%), the federal estate tax will be $416,364.
Creditors. Also, assume that at some time in the future you have a bad commercial transaction, or a professional negligence situation, or a personal injury accident, or a divorce after a recent marriage. Without a residence trust, your future creditor will be able to force a sale of your residence, give you the first $67,500 and keep the remainder of the sale proceeds to satisfy the judgment.
Form an Alaska Residence Trust. What if, instead, you place your Alaska residence in an Alaska qualified personal residence trust? This is a trust that you form and then direct that you are retaining the use of the residence for a certain number of years. At the end of that time, the residence will then be held in trust for the benefit of your family (for example, your spouse and children).
Gift. Let’s assume that you decide to retain the use of the residence for 15 years. You will be making a gift under the federal gift tax. However, this gift is only of the value of the interest that passes to the family after the15 year period. In addition, this gift will also be discounted for the risk that you may die during the 15 year period. If the federal interest rate that applies is 6%, then this gift would be $123,016. Your gift can be offset by part of the tax credit that each of us has in order to protect against a certain amount of transfers. Therefore, you will probably not have to pay any gift tax.
Estate Tax. Once you have made this gift, and if you live for the period of years you select, then the residence will no longer be included in your estate for federal estate tax purposes. This means that you can get your residence out of your estate, for federal estate tax purposes, for a gift of only $123,016. Compare this to the $925,253 value that would be taxed at your death if you kept the residence.
Tax Savings Bottom Line: In our example, you will save $361,007 in estate tax because you used an Alaska residence trust.
NOTE: In 2010, the Federal Estate Tax does not apply.
Asset Protection. In addition, and equally important, Alaska state law provides that an Alaska residence that has been placed in an Alaska qualified personal residence trust is fully protected against your future creditors,. This rule applies no matter how large the value of the residence. Asset Protection Bottom Line: An Alaska residence trust provides excellent asset protection for perhaps your most important asset, your home. Very few other states provide this type of asset protection for residences.
Flexibility. If you decide to sell your residence during the period of time when you have retained its use, you have two years within which to roll over the proceeds into the purchase of a new residence. If instead, you decide not to purchase a new residence, then you will be paid an annuity for the rest of the period of time that you otherwise would have retained the use of the residence.
If you have any questions about an Alaska residence trust,
you may contact us by using the information set out below:
SHAFTEL LAW OFFICES, P.C.
1029 West Third Avenue, Suite 600
Anchorage, Alaska 99501
FAX: (907) 278‐6015