In the United States home ownership has traditionally been the foundational cornerstone of wealth building. Many Americans over the years have engaged in the practice of devoting a large portion of their investment capital into their homes, stepping up at strategic times, making renovations, and sometimes focusing on extinguishing their mortgages as quickly as possible.
We’re all aware of the fact that the recent downturn in the housing market has altered the paradigm to some extent. But the people who are interested in inheritance planning who own their homes outright at this point in time are likely to have benefited from significant appreciation. So many people would say that their homes represent the lion’s share of their legacy from a financial perspective.
On an emotional level, since the house may contain some of the most formative memories of your loved ones who are in line to inherit the home the thought of selling it to pay the estate tax may be a sad one indeed. If the value of your home is pushing the overall worth of your estate above the lifetime gift/estate tax exclusion you may want to consider the creation of a qualified personal residence trust.
With these trusts you appoint a trustee and name your beneficiary who will assume ownership of the home when the term of the trust has expired. You can live in the home for as long as you want to rent-free but you are responsible for maintenance and property taxes.
Once the trust term has ended the home becomes the property of your beneficiary. This transfer constitutes a taxable gift, but the taxable value of the home is reduced by your retained interest in the property. If this amount winds up being less than the $5 million unified estate/gift tax exemption the property will have changed hands free of taxation.
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