When you are planning your estate as a person who has been financially successful you should be well aware of the looming specter of the federal estate tax. This death levy carries a 40 percent maximum rate. The amount of the exclusion in 2014 is $5.34 million.
The exclusion or credit is the amount that you can transfer free of taxation. If you intend to transfer more than $5.34 million to your heirs you should consider tax efficiency strategies.
When you are calculating the overall value of your assets for tax purposes you should be aware of the fact that everything that is in your personal possession counts, including your home.
You may be able to realize a great deal of estate tax efficiency if you could reduce the taxable value of your home. With this in mind, let’s look at qualified personal residence trusts.
QPRT’s for Tax Efficiency
To reduce the taxable value of your home you could convey it into a qualified personal residence trust.
Suppose you intend to leave the home to your son after you pass away. Under these circumstances you would make your son the beneficiary of the qualified personal residence trust.
Don’t worry, you do not have to move, and you are not handing over control of the home to your son immediately.
You determine a length of time during which you may continue to reside in the home as usual. In fact, the longer you remain in the home, the more you will save in taxes.
Once you convey ownership of the home into the trust you are no longer the direct sole owner, so the home is no longer part of your estate for tax purposes.
However, there is the gift tax to contend with under these circumstances. When you fund a trust for the benefit of someone else you are giving this person a gift. In this case, the act of conveying the home into the qualified personal residence trust would be looked upon as an act of taxable gift giving by the Internal Revenue Service.
The gift tax is unified with the estate tax, and they both carry the same $5.34 million exclusion and 40 percent maximum rate.
Where are the savings you ask? The taxable value of the gift is not going to be equal to its fair market value. This is because of the fact that you are retaining incidents of ownership as you continue to live in the home.
If you tried to sell a home under the stipulation that you would be remaining in it for five, 10, or 20 years, it would not sell for full value. The IRS take this into account.
Therefore, the house would ultimately be transferred at the end of the trust term at a significant tax discount.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.