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Home Value & Estate Tax Exposure

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Throughout most of last year there was a lot of uncertainty about the future of the estate tax, but that was cleared up in the middle December when a tax relief measure was passed through Congress. It is now being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and as a result of provisions within it the estate tax exclusion is $5 million and the maximum rate of the tax is 35%. In a nutshell this means that if your estate is worth $5 million or less it is exempt from the tax. The portion of your estate that exceeds $5 million is subject to the 35% levy.

However, the parameters above are not permanent. This tax relief measure is going to sunset at the end of 2012, and if it does so without any new legislation having been enacted the rate of the estate tax will be 55% and the exclusion will be reduced to just $1 million. So if no changes to the laws are made in the meantime your estate will indeed be subject to the estate tax in 2013 if it is worth more than $1 million.

If you are like a lot of people it is the value of your home that is pushing you into taxable territory, and if you’re in this situation you may want to consider the creation of a qualified personal residence trust. With these trusts you name a beneficiary who will ultimately assume ownership of the property, and you decide on a term during which you will continue to live in the home rent-free. By doing this you remove the home from your estate for estate tax purposes.

This action does constitute a taxable gift, but the taxable value of the home is reduced by the interest that you retain in it while you continue to use it as your place of residence. This taxable value is going to be far less than the true fair market value of the home. In most cases it will be less than the gift tax exclusion that is available to you, and if it is the eventual transfer to your beneficiary will take place in a tax-free manner.

Paul Gantner
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About Paul Gantner

I am an owner of Amen, Gantner & Capriano, Your Estate Matters, L.L.C. I have been able to bring my business and legal education and experience into a firm that has for many years provided comprehensive estate plans that meet clients’ needs and expectations. My passion has been creating and constantly pushing AGC’s mission of “Helping Families Secure their Legacies by Embracing them into the Law Firm Family through Long-term, Personal Advisory Relationships.”