Trusts & Estates
May 01, 2023
Consider These Trusts in a Rising Rate Environment
Interest rates have risen and have presented some options for you to consider. Qualified Personal Residence Trusts (QPRT) and Charitable Remainder Trusts (CRT) are irrevocable trusts that tend to offer potential benefits in a higher-rate environment.
Qualified Personal Residence Trust
A QPRT allows you to make a future gift of your home or vacation home by transferring ownership into the trust, while retaining the right to live there for a specified number of years. However, if you do not outlive the term, the entire value of your home is included in the taxable estate.
- Value of your gift is the excess of value at funding over the value of the retained usage right, which is calculated using the Section 7520 rate in effect when funded.
- The higher the Section 7520 rate, the lower the taxable gift value.
- Can use multiple QPRTs to hedge against mortality risk and generate fractional interest discounts, further lowering the taxable gift value.
- Remainder beneficiaries receive an income tax cost basis equal to your cost basis at the time of the gift.
- If the home has appreciated substantially, remainder beneficiaries may owe increased capital gains tax when the home is sold that may reduce or offset any gift and estate tax savings.
- In some states, the homestead protection on a primary home terminates at the end of the QPRT term, potentially triggering a significant increase in real estate taxes.
For more information on QPRTs, please read Leveraging the Federal Gift and Estate Tax Exemption Through a Qualified Personal Residence Trust.
Charitable Remainder Trust
A CRT lets you donate assets to charity and draw annual income for life or for a specific time period. The return of funds to one or more persons can be in the form of either an annuity (set percentage of funding value) or unitrust (set percentage of value updated annually).
- Can be created during your lifetime or at death and can be funded with almost any type of property that can be properly valued.
- In a rising rate environment, the annuity form of CRT is particularly efficient.
- Helps to plan major donations to charities and create a philanthropic legacy.
- Retains an income flow to one or more persons for life or over a specific time period.
- Defers income taxes on the subsequent sale of assets transferred to the trust.
- Generates a partial charitable deduction based on the value of the charitable interest in the trust.
- Changes generally cannot be made to the trust (although there is the ability to structure the trust to allow you to modify the charitable remainder beneficiary).
- Substantial assets usually are needed for a CRT to makes sense.
- Once assets are contributed into the trust, management over them transfers to your selected trustee.
- “Exhaustion test” provides assurance to the IRS that some of the assets ultimately will go to charity, which means they won’t go to your heirs.
For more information on CRTs, please read Charitable Remainder Trusts: Combining Lifetime Income and Philanthropy.
To learn more about these trusts and how they might fit into your wealth and estate planning goals, please contact your Glenmede Relationship Manager or visit us at Glenmede.com.
This material provides information of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. Any opinions, recommendations, expectations and/or projections expressed herein may change after the date of publication. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss any matter discussed herein with their tax advisor, attorney or Glenmede Relationship Manager.