At the beginning of next year the estate tax exclusion is being reduced from $5.12 million to just $1 million. At that time the maximum rate of the tax is going to change as well under currently existing laws. Right now we’re looking at a 35% top rate; in 2013 it goes up to 55%.
When you are calculating your total assets in an effort to assess whether or not you are in taxable territory you must include the value of your home. Using 2009 figures the median cost of a freestanding residence in Somerset County was over $600,000.
So, when you are talking about the typical home being valued in this vicinity a lot of local families will find themselves exposed to the federal estate tax next year.
One way to respond to this would be to place your home into a qualified personal residence trust. When you take this action you are removing the value of the home from your estate for tax purposes.
You can continue to live in the home as usual rent-free for a term that you elucidate when you are drawing up the trust agreement.
Funding the trust with the home is considered to be an instance of taxable gift giving. However, since you are not transferring ownership of the home until the term has expired you are retaining interest in it. As a result its taxable value is nowhere near its full market value.
Employing this strategy may be a good way for some homeowners to gain tax efficiency given the coming changes to the estate tax parameters.