Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, April 8, 1990                   TAG: 9004060164
SECTION: BUSINESS                    PAGE: F-10   EDITION: METRO 
SOURCE: ANDREE BROOKS THE NEW YORK TIMES
DATELINE:                                 LENGTH: Long

TREATING HOME AS SHARED ASSET SAVES ON TAXES

As a result of those higher values, more homeowners are finding themselves with combined assets substantially beyond the $600,000 - called a "unified credit" - that the federal government allows taxpayers to pass along to their heirs, free of estate and gift taxes, either during their lives or after death. Anything above the $600,000 threshold is taxed at 37 to 55 percent, depending on the size of the excess.

What can be done to lessen the impact of home ownership on the amount of tax likely to be due?

First, some basics. Every taxpayer is allowed by the government to give away, say, to an adult child, $10,000 a year in addition to the exemption of $600,000. Many people therefore actually have at their disposal far more than the $600,000.

"The key is to use that opportunity wisely," said Martin M. Shenkman, a tax lawyer and author of "The Total Real Estate Tax Planner."

Jerome Deener, past president of the Estate Planning Council of Bergen County, N.J., and a lawyer in Hackensack, N.J., proposed the creation of a Grantor Retained Income Trust.

A GRIT allows a donor to give away a home with reduced impact upon gift and estate-tax exemptions while permitting him to continue to use it. GRITs are irrevocable and usually run 10 years, but a GRIT consisting of a personal residence may run indefinitely with no limit on the discount.

The value of the home for tax purposes can usually be set at 30 to 40 percent of its current value with the extent of the discount dependent upon the length of the trust.

Deener gives as an example a house currently worth $800,000. Title passes to a 10-year GRIT, immediately lowering the "value" for estate-tax purposes to $302,000. Even if the house were to appreciate in value to $1 million during the 10-year period of the trust, it would still be valued - for estate tax purposes - at the original $302,000.

Under this example, no gift tax is payable by the donor at the creation of the GRIT and the property will pass to the child on termination of the GRIT without further tax consequences. If the donor wants to continue to live in the home after the 10-year term, the parties can enter into a lease arrangement.

If the house is sold during the term of the GRIT, the proceeds can either be retained in the trust with interest payable to the donor or be reinvested in another house, utilizing the tax-free rollover. If the house is sold after the termination of the GRIT, the child will pay income tax on the difference between the proceeds of the sale and the original purchase price of the house, plus any improvements.

The trust can be terminated at any time, but with a partial loss in tax benefits. However, if the donor dies during the GRIT's term, the tax benefits would be lost.

A GRIT can cost from $2,500 to $5,000 to establish, depending on circumstances, and should be set up by a lawyer who specializes in estate planning.

Shenkman, the tax lawyer, offered a way of minimizing tax when a family also owns a vacation home. This technique restructures the vacation house as an investment property, which would allow title to be held in the name of a partnership that includes both the current owners (the parents) and their children.

To start out, ownership of virtually the entire partnership would be held by the parents. Each year, a proportionate interest, worth up to $10,000, could be transferred to each child so that finally all - or most - of the ownership of the partnership, and thus the property, would be held by the children without incurring any gift taxes or using any of the $600,000 unified credit.

Transfer could be made even faster, added Shenkman, if other possibilities were included. For example, say both parents were still living and were joint owners of the house.

Each parent could give each child $10,000 worth of interest in the partnership a year, adding up to $20,000 a child a year. If those children were married, each couple could get $40,000 a year from the parents. A child receiving such gifts incurs no income-tax liability.

If one of the parents dies before the entire amount has been transferred, only the amount remaining in that parent's name would be factored into his or her estate. With values sagging in many areas, this is an excellent time to start such a transfer, suggested Shenkman, since the value of proportionate interest being transferred each year is based on the total value of the property at the time the annual gift is made.

"Thus, if the value of the property started to rise sharply again in a few years," said Shenkman, "you might find that you had given away, tax-free, a share that is soon worth far more than the original amount." The cost of establishing such a partnership starts at $1,000 and rises according to its complexity.

To get maximum mileage out of their respective $600,000 exemptions, the couple should also make sure that their home is jointly owned in the form of "tenants in common" and not "tenants by the entirety" - the customary way a married couple jointly own title to a home.

Deener noted that if one spouse dies and the home is still owned in the form of "tenants by the entirety" the full value of the home will be transferred to the surviving spouse, free of any estate tax. This may initially appear advantageous, but could ultimately be more costly because the full value would become part of the surviving spouse's potential estate.

Had the couple owned that home as "tenants in common," half of its "ownership" would have been included in the estate of the first spouse to die - $400,000 worth of value in the $800,000 example above. Later, although the survivor may have continued to live in the home, only half - or another $400,000 - would be in that spouse's estate, the first half having already passed to a "credit shelter" trust under the first spouse's will, which would result in its being exempt from taxes as part of the surviving spouse's estate. Even the value of any subsequent appreciation would be halved.

Stuart Saft, a Manhattan real estate lawyer, said, however, that the opportunity to own property as "tenants in common" is not available in those states that have strict dower laws designed to protect a wife from losing her rights to portions of her husband's estate.