ON THE PATH TO BECOME A PRIVATE ANNUITY TRUST

COUNSELING CLIENTS

What strategies can planners suggest for clients who already own multiple homes in overvalued markets? If the bubble has not deflated in your area, you might counsel clients to sell their second homes if they want to get top dollar.

"We have a client who just sold a vacation home and an adjoining lot in Tahoe," says Stone, referring to the area around the lake that spans the California-Nevada border. "He wasn't using it enough to keep it, and he got a good price: $1.2 million." The price was so good, in fact, that the client would have had an $800,000 gain and a steep tax bill. "To defer the tax, we suggested this client sell the property to a private annuity trust," Stone says.

In this arrangement, the real estate is sold to a trust, which in turn makes a sale to a third party. The trust then reinvests the proceeds and pays lifetime income to the original owners as well as any balance to designated heirs. This way the client can defer income tax on the sale, effectively provide the heirs with a basis step-up and remove any funds left in the trust from the seller's taxable estate. But there are potential gift tax consequences, depending on the seller's age and the cash flow paid by the trust (see "Going Private," below).

Another tax-effective move is for clients to sell their primary residence and move into what had been a second home. The $250,000 home-sale exclusion ($500,000 for married couples) would shelter gains from the sale as long as the seller had lived in the house for at least two of the previous five years. If the clients decide to sell the former vacation home after living in it for two years, they would qualify for another $250,000 or $500,000 tax break.

"A married couple I represent did this recently, moving from the San Francisco Bay area to Tahoe," says Jane Williams, chief executive officer of Sand Hill Advisors, a wealth management firm in Palo Alto, Calif. "They sold their primary residence and moved into their vacation home." Williams works with many people who are experiencing a major life transition, such as a divorce or the death of a spouse. "The family home, which is often a major asset, can be an expense rather than an income-generator," she says. "For people with more real estate than they can maintain, we encourage downsizing."