Ken Moraif  

For most of you, your home is the largest asset that you have. Did you know you can actually pass it on to your greedy, unwashed, undeserving heirs? Tax Free? Yes, I did say tax free. Hello everyone, and welcome to the retirement planners of America podcast. In this podcast, we’re going to continue in our series of estate planning podcasts, and this, this episode is going to be on passing on the largest asset for most people, and that is their home, tax free to your greedy, unwashed, undeserving heirs. And so we’re going to dive into that. And as usual, when it comes to this stuff, we’re going to have more fun than a human being should be allowed to have when talking about all this boring estate planning stuff. So let me bring into the conversation my co host, Jeromy, good to see you. It’s wonderful to be here. And are you having more fun than a human being should be allowed to have when talking about all this boring financial stuff,

Jeremy Thornton  

I totally agree. I will say a caveat to that is the bar pretty low the bar for having fun talking about financial stuff, not super high. You mean high the bar? Oh, sorry, it’s like jet ski and then financial stuff just slightly below it, just barely, barely,

Ken Moraif  

it’s getting too jet ski, right? Yeah, yeah, okay, well, then you’re gonna really enjoy this.

Jeremy Thornton  

Love it. So passing on a house is obviously some most people’s biggest asset? Yes, and that can be kind of a daunting concern, especially for people receiving that house. They think about the financial implications of all that kind of stuff, and they think, Okay, well, am I gonna have to pay out cash for this house so it’s gonna lower the amount that I’m getting as somebody that is receiving something, and that can definitely be a concern for somebody that is

Ken Moraif  

inheriting it, yeah, yeah, yeah, yeah. So first thing to to alleviate that concern for you, the estate taxes are paid by the decedents estate, not by who inherits it, right? So as a greedy, unwashed, undeserving heir of your parents home if you if you were to so inherit, the tax is paid by their estate, right? Once you receive it, you owe no taxes on that, right. So really, what the planning strategy is about is protecting the estate from the tax before it goes to the heirs, right? And so that’s what we’re talking about today, is, how do we reduce those taxes in the future?

Jeremy Thornton  

So, so a little birdie has told me about a qualified personal residence

Ken Moraif  

trust, yeah, you know, it’s really interesting to me that in most cases, when it comes to estate planning, it becomes a trust. Yes, trusts are like the thing, yeah. And so this is, you’re right. It’s the qualified personal residence trust, right, also known as a

Jeremy Thornton  

cupert. Love. It got another acronym,

Ken Moraif  

so we’re gonna be talking about the cupert. Yeah, so why would you want a cupert? Well, let me, let me ask you a question. Jeremy, okay, so it’s a hypothetical, because it’s not really going to happen, right? Okay, so don’t get excited, okay, okay, but let’s say I’m going to give you a million dollars, $1 million so you have a choice of which million dollars you want. Okay, I’m gonna give you this million dollars, like, right now, I’m gonna write you a check. You got it today, or I’m gonna give you this million dollars. I’m gonna put it in a trust, and you’re gonna get this million dollars 30 years from now, when I die. Wow. Which one, which one do you like best?

Jeremy Thornton  

I would prefer the money now.

Ken Moraif  

Okay, so then why would you prefer it now?

Jeremy Thornton  

Because I can use it now. Okay,

Ken Moraif  

the right answer is, Because 30 years from now, inflation will have eroded. Yeah, it wouldn’t be worth the value of the million dollars. And if I have to wait that long, $1,000,000.30 years from now will not be worth the same as it is today. Absolutely, absolutely. So that’s, that’s what,

Jeremy Thornton  

sorry, what I meant to say was,

Ken Moraif  

you gotta, you gotta lead me down the path. Yeah, yeah. So that’s what the cupert is about. Yes, okay, that concept is called present value discounting. Okay. So when you set up the cupert, what you’re going to do is you’re actually going to change the title to your home, the ownership of your home, and you’re going to put it in the cupert. So now the trust owns your home, right? And this is an irrevocable trust, and we’ve talked about that in the past, where you are not the owner of the assets in the trust. Now, right? So everybody immediately. He just went, oops, wait, I don’t get to own my home that. I don’t like that idea, right? Okay, I’m gonna get to that. So when you put your home into this trust, what you’re then gonna say is that the home will pass to the heirs 20 years from now, 30 years from now, you set a date. Okay, so now let’s say your home was a million dollars, and you put it into this trust, but you tell the heirs in the trust you cannot touch this home. It’s not gonna be yours for 30 years. Okay, so what is the value of a home that they’re going to inherit 30 years from now in today’s money, right? So what you do is you do a discounting, right? So you discount it all the way down till today and put it in today’s money. So if you invested X dollars for 30 years to make it worth a million dollars, how much would you need to invest today? It’s a significantly lower amount, right? So when you’re putting your home into this trust, what you’re doing is you’re making a gift, right? You’re gifting your home today into this trust for your greedy, unwashed, undeserving heirs. Okay, so now, how much is the value of that gift? Yes, well, because of that discounting, you’ve discounted this million dollar home. I’ve seen discounts of 75% in some cases where the actual gift that you’re making is actually only a $250,000 gift, not the full million. Wow. And that way you can now put it into the trust. It’s no longer in your estate. Upon your death, it’ll pass to them without any estate tax. So that’s the the the reason why you can get your home out of your state. So ask me the questions about now you’re, you’re the person that just did this. Where are you getting a little concerned here?

Jeremy Thornton  

Okay, well, what happens if this gift, let’s say is 20 years, let’s say Modern medicine is continuing to improve. Let’s say I live for another 40 years, and I and I in this trust, I say I’m giving this house away, and 30 years and I live past

Ken Moraif  

that beautiful that is one of the downsides, and that’s the guessing game that you have. Oh no, right, yeah, because you could live out live it, yeah. Now, if you do outlive it, then what happens is that the house goes to the kids they now own, it Gotcha. And so the way we address that is we have the, what’s called, what we call the block provision. Okay? So the block provision is where you take your kids for a walk around the block, and you explain to them that if they want to mess with you, when it comes to the house, it’s in the trust. Yeah, everything else they thought they’re gonna get, yeah, you ain’t gonna get it. Yeah, right, yeah, that’s fair. So the block provision is a pretty effective method of counteracting that situation.

Jeremy Thornton  

Yeah, okay, that’s okay. That’s very interesting. Okay, so what happens? I’m trying to think of, like, the different different

Ken Moraif  

problems. Well, one thing that people get very concerned about is, okay, the trust. Now, you know, owns my homes, my home, where do I live? Do I get to live there? Yeah, right. And the answer is, yeah, you do. Okay, good. You can live there literally for the rest of your life. No one can unless you pass the period of the trust. Yes, no one can ever evict you. Ask you to leave whatever while you’re living there, you can decide to paint the house purple with yellow polka dots, yeah, you know, put lawn chairs in the furniture. You can do whatever you want with this house, yeah? And you have complete control. You are able to do that. So the trick is to figure out how long is the period of the trust. Normally, you want to make that beyond your life expectancy, right? And that way you’ll live in this house, and you’ll have complete control over it for the rest of your life, and you cannot, as I said, be evicted. No one can tell you what to do or whatever. And it can also be sold before that period. Okay, right? So if the value of the house is appreciated dramatically, and now you want to just sell it, because you know, you want to move to Colorado or something, you can sell it. The money will then reside in the trust, and it can buy a new house, okay, your Colorado home, in this example,

Jeremy Thornton  

what would be the reason, then, for not setting that sell date or that that finalization date 200 years from now? If it only matters?

Ken Moraif  

Well, it has to be reasonable. Okay, okay, the IRS is stupid, but they’re not that stupid, so it has to be reasonable. You know how long you’re going to live? Yeah, so and so there’s a push and pull, because the longer the life of the trust is right, the more the discount is right. Because if you say, Well, I’m only going to say 10 years from now, yes, then you get a smaller discount than if you say 20 or 30 years, so the longer you push it out, yeah, the bigger the discount.

Jeremy Thornton  

Yeah. And does IRS have, like, a set of rules, like they just, yeah, of course they do. So like me for asking, that’s my bad.

Ken Moraif  

Yeah, you have to. They give you the imputed interest rate that you discounted by. They give you the this is all. So very the cuperts are. They’ve been around for a long time. Gotcha? Yeah, there’s a lot of there’s a lot of case law, everything else on those so it’s a very established strategy that people use. I would say, you know, for people whose home is a large I would say, if your home is worth more than $750,000 that’s when you start thinking about whether you should do this or not, because there is cost involved in creating the trust, right, you know, and there’s thought processes and all that. And then you have the time, so it needs to be worthwhile from a tax standpoint to get it out of your estate, particularly if you have a house that you think is going to appreciate significantly over the next 20 years, yeah, all the appreciation. So let’s say, in this million dollar home example, and you discount it down, and you’re making a $250,000 gift now, and that therefore avoids your gift tax, because you’re using your exemption, and so now you’ve essentially passed it on tax free. But this house now, let’s say, over the next 30 years, it’s in a real nice place, and it’s, you know, appreciated, and now it’s worth, I don’t know, 10 million. Yeah, okay, that entire 10 million will pass on tax free. Wow. So it’s not just today’s value of the house that you got out of your estate. It’s also all the appreciation on the value of that home that’ll happen over the years. So it’s a significant strategy, but it’s not for everyone. Yeah, and

Jeremy Thornton  

talk to your financial advisor, talk to your expert, talk to your lawyer.

Ken Moraif  

Yeah, as usual, as always, everything we talk about on this, on these podcasts, these are our opinion. I’ll say, Yeah, educated opinion, but we’re not lawyers. We don’t practice law. Everything needs to be done by your professionals, so make sure you talk to them first. Awesome. All right. Well, ladies and gentlemen, thank you for watching this podcast. I hope you found it more fun than a human being should be allowed to have and remember, because we are we specialize in retirement planning. We work with people who are over 50, who are retired or retiring soon, and our goal is to create what we call SCWPerS. SCWPerS are people who are retired. SCWPer is an acronym for second childhood without parental supervision. So when our clients retire, we call them a SCWPer, and we tell them to get out of here. Go play, have fun. Let us worry about all this boring stuff for you so that you don’t have to so thanks for watching. Make sure you go to our website, rpoa.com you like and subscribe and we’ll talk soon. Retirement planners of America, rpoa.com you.