You have to keep potential estate tax liability in mind when you are planning your estate. Right now the estate tax exclusion is $5 million, which means that the portion of your estate that exceeds this amount is subject to the estate tax. At the present time the maximum rate of the tax is 35%, which is quite a bite. However, you cannot rest easy if your estate is worth at least $1 million but less than $5 million.
When the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires at the end of 2012, the estate tax exclusion goes back to $1 million, and believe it or not, the maximum rate of the tax is going to come in at an incredible 55%. This is of course assuming that there is no new legislation passed in the meantime that changes these parameters. So if you’re not planning on passing away before 2013 rolls around and your estate is worth more than $1 million, the estate tax should be a source of concern.
Many people would say that their home is the single most valuable asset that they have, so you may inventory your assets and recognize that the value of your estate would fall under the estate tax exclusion if you could remove your home from the equation. If you are in this position one thing to consider would be the creation of a qualified personal residence trust.
The way that it works is that you place your home into the trust and name a beneficiary who will assume ownership of the home after the trust term has been completed. While creating the trust you decide on a period of time that you will remain in the home living rent-free, so nothing really changes in your day-to-day life.
By funding the trust with your home it is removed from your estate for estate tax purposes, but this transfer is considered to be a taxable gift. The tax savings lies in the fact that the taxable value of this gift for tax purposes is reduced by the interest that you retain in the home while living in it. As a result the taxable value will be far less than the true fair market value, and if this amount falls below the gift tax exemption amount your beneficiary will ultimately assume ownership of the property in a tax-free manner.
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.