As many people are aware, the new tax bill that was passed through Congress at the end of last year had an effect on estate planning. Due to provisions contained in this measure, which is now formerly being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the estate tax exclusion is $5 million, and the top rate of the tax is 35%. This means that only the portion of your estate that exceeds $5 million is subject to the federal death levy.
When you read the above you may breathe a sigh of relief if your estate is worth less than $5 million. However, you have to remember that this tax act is going to expire at the end of 2012. As the laws stand right now, if it does sunset as scheduled the estate tax exclusion will be reduced to just $1 million, and the rate of the tax will rise to a jaw-dropping 55%. So it would be logical to suggest that anyone who has an estate worth more than $1 million may want to consider seeking ways to reduce the taxable value of his or her estate.
One way of doing this would be to remove the value of your home from your estate, and this can be achieved through the creation of a qualified personal residence trust. You fund the trust with your home, but you continue living in it for a period of time that you determine when you draw up the trust agreement. You name a beneficiary, and this would presumably be the person who would otherwise inherit the home. By creating the trust you remove its value from your estate and gain estate tax efficiency in the process.
There is the gift tax to contend with, but the beauty of the QPRT lies in the fact that the IRS does not use the home’s true fair market value to determine its taxable value. That value is reduced by your retained interest in the home, so its taxable value is going to be far less than its actual value. If this amount winds up being less than the unified estate/gift tax exemption that is available to you, no tax will be due on the transfer when your beneficiary assumes ownership of the property.
Alan Augulis, Estate Planning Attorney
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