In 2011 the estate tax is going to be in force, and what is especially noteworthy about it is the change in the exclusion. When the tax was last in effect in 2009 the exclusion amount was $3.5 million, meaning that only the portion of your estate that exceeded that amount was subject to the tax. If your estate was worth less than this, you owed no estate tax. In 2011 the exclusion amount has been reduced to just $1 million, so those with estates valued between $1 million and $3.5 million are now in the crosshairs of this federal levy that carries a maximum rate of 55%.
Your most valuable asset may well be your home, and due to this change in the exclusion it may be your residence that pushes your estate’s value above $1 million. So if you can remove the value of your home from your estate without losing anything in the process you could effectively escape estate tax liability. If you are in this position, you may want to consider the creation of a qualified personal residence trust.
With these vehicles you place the home into the trust and name your children or whoever your heirs are as the beneficiaries. You can then continue to live in the home rent-free without skipping a beat, but the value of the home has been removed from your estate. When you draw up the trust you state the term during which you will be living in the home, and this is considered to be your “retained interest.” It should be noted that if you were to pass on before this term was up the property would revert back into the estate.
There is a gift tax applicable to the transfer of the home, but the fair market value of the home is not used to calculate gift tax liability. The actuarial value of your retained interest is deducted from the taxable value. If this amount does not exceed the lifetime gift tax exemption of $1 million, the property was passed on to your heirs free of the gift tax and the value of your estate has been reduced for the purposes of estate tax efficiency.