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
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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