Things are changing at the end of this year with regard to the estate tax exclusion and this is something that everyone should be very well aware of because the implications are considerable.

Throughout this year the estate tax exclusion is $5.12 million but this cushion is going to vanish in 2013. At the end of this year the tax relief act that was passed in 2010 expires, and under existing laws this means that the estate tax exclusion goes down to just $1 million.

If you are thinking that your heirs will just pay the tax and be done with it, next year this federal levy is carrying a 55% maximum rate. Having the federal government as a partner owning over 50% of your assets could be devastating to your family.

Your real property counts as part of your taxable estate, so when you think about its equity value being added to everything else that you own you may find that you will indeed be exposed to the estate tax in 2013.

An option that is available to you would be to fund a qualified personal residence trust with your home, and in so doing you would be removing it from your estate.

When you create such a trust you set a term during which you remain living in the house. When you transfer your home into the trust it is a completed taxable gift of the value of the house less a value attributed to your lifetime occupancy. This net gift value is used against your lifetime exclusion, today $5.12 million. At that point the asset is out of your estate. At the end of the trust term your beneficiary assumes ownership of the property. You may continue residing in the house in return for paying fair market value rent.

This can be a useful tax efficiency strategy for those who face estate tax exposure at the end of the year.

Larry Parman
Author, President and Founding Attorney
Parman & Easterday