Wills and Trusts
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Many of you have heard me emphasizing the need for each and everyone to have a will. I have discussed this in depth in many seminars and in formal and informal gatherings as well. It is our Islamic duty to create a will to secure our future. It is more important to have a will in this great land of opportunity as here we do not have the Islamic Law of Inheritance.
Before I continue further, let me reiterate what has been said many times over, I am not an attorney, nor an expert on estate planning. I am simply sharing the information I have learned with you so you can find further professional help regarding this matter.
Do you own a valuable house? Are you likely to leave an estate large enough to be subject to federal estate tax?
If so, placing your house in a qualified personal residence trust (QPRT) can cut the eventual tax bite.
Here’s how it works: You create an irrevocable trust for a specified number of years, placing your house in the trust while retaining the right to live there.
Because your gift to the trust is a gift of what the Internal Revenue Service calls a “future interest,” it does not qualify for the annual gift tax exclusion of $10,000 per person.
But it does qualify for a discount, based on your age and the length of the trust. That discount is key to cutting estate taxes.
Let’s say you own a house valued at $400,000. Giving it outright to your children would mean using up a substantial portion of the $675,000 total you currently can give away without any of it being eaten by gift or estate taxes.
Give the house to a QPRT instead, reserving the right to use it for a term of 10 years. The taxable value of the gift could be as little as $120,000.
Transfers of jointly held property are complicated. I suggest changing the form of ownership from joint ownership to tenants in common. Under this arrangement, the husband and wife each own half the house and can place the halves in two separate trusts.
The value is reduced first simply by dividing the ownership. For the sake of a rough illustration, suppose that reduction is 15% of its value. Half a house is worth less than a fractional interest in the whole.
After marking down the value of both halves by 15%, each trust holds $170,000. Then the discounted value of each trust is calculated, based on current federal interest rates.
In this example, a 10-year trust where both spouses are age 65 results in a combined taxable gift for the couple of about $120,000. As a result, you took a $400,000 house out of your estate for a song. (Continued...)
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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