One of the first things you are going to have to do when you get started planning your estate is determine if it is exposed to the estate tax. This is something that is a little bit easier said than done, because the estate tax exclusion is frequently changed so you could be exposed to it one year and protected the next.

This is one of the reasons why it is a good idea to recognize that estate planning is an ongoing process and that adjustments are likely to be necessary. You don’t want to be lulled into a false sense of security thinking your legacy is exempt and then have your heirs find out later that changes to the laws had resulted in estate tax exposure that consumed an enormous chunk of their inheritances.

And speaking of these changes, the estate tax exclusion is $5 million right now, and the rate is 35%. But, when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires at the end of 2012 the rate of the tax is scheduled to increase to 55%, and the exclusion will be slashed to just $1 million.

A lot of people could stay within the exempt amount if it was not for the value of their homes. If you’re in this position, one possible response would be the creation of a qualified personal residence trust which is often shortened to the acronym QPRT. The way that it works is that you fund the trust with your home and name beneficiaries that you would like to see inherit the home at the end of the trust term. This removes the home’s value from your estate for estate tax purpose.

But when you are creating the trust you decide on a period of time during which you will continue to live in the home. The taxable value of the gift into the trust is reduced by the value of the interest that you retain in the home while still living in it. This value will be much lower than the fair market value of the property. So the home will eventually change hands with a greatly reduced tax responsibility.