The estate tax is something that you should be very aware of when you are engaged in legacy planning because it can truly have a life changing negative impact on your family members.
Contrary to popular belief, the estate tax is not imposed only upon those who are very wealthy. At the present time the estate tax exclusion is $5 million and the rate of the tax is 35%. But if no changes to the laws are made between now and then, in January, 2013, the estate tax exclusion will go down to $1 million and the rate will go all the way up to 55%.
If you created a long-term financial plan and made some good investments while enjoying a solid career you may very well find yourself with assets in excess of $1 million, especially when you include the value of your home. Should you want to remove your home’s value from your estate in an effort to reduce your estate tax liability you may want to consider creating a qualified personal residence trust.
The way it works is that you fund the trust with your home and name your beneficiaries. When you are creating the trust you decide on a term during which you will continue to live in the home rent-free as normal. At the end of the trust term, your beneficiaries inherit the property. You continue to occupy the home, paying the trust rent for the privilege.
Creating the trust removes the home’s value from your estate for estate tax purposes, but it is subject to the gift tax. Under IRS regulations the taxable value of the home is reduced by the interest that you retained in the home while continuing to live in it. As a result, this taxable value will be far less than the true market value. If it winds up being within the gift tax exemption, the transfer of property will take place in a tax-free manner.
Larry Parman
Founding Attorney
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