There are those who are working with the idea that the estate tax only applies to the wealthy, and it would be fair to say that whether or not this is true depends upon your definition of wealthy. The estate tax exclusion in 2011 is going be $1 million, so any portion of your total estate that exceeds this amount is subject to a tax with a top rate of 55%. No, that is not a typo, the maximum rate of estate taxation in 2011 will be 55%
Many would say you don’t have to have been born with a silver spoon in your mouth to have accumulated more $1 million in total assets over the course of your life. For a lot of people, it is the value of their homes that is going to put their estate over the estate tax exclusion amount. So the logical estate planning strategy would be to find a way to remove the value of the home from the overall value of the estate, and this can be done through the creation of a QPRT or qualified personal residence trust.
What you do is place the home in the QPRT and name your heirs as the beneficiaries. In the terms of the trust you state a period of time that you will be continuing to reside in the home; you can live in it rent-free and life goes on as usual. But now your home is no longer a part of your estate as it is a property of the trust. However, if you were to pass away before the stated term in the trust expired the house would go back into the estate.
There is the gift tax to contend with, but the actual market value of the home is not used by the IRS. The taxable value is reduced by your retained interest in the home, and this resultant value is often going to wind up being less that the $1 million lifetime gift tax exclusion. If it is, ownership of the home was transferred free of taxation, and its worth has been removed from the overall taxable value of your estate.
- How Will You Age in Place and Be Able to Die at Home? - August 16, 2020
- Beneficiary Designations and Other Non-Probate Transfers - August 15, 2020
- Leaving Assets Can Be Tricky – Part 3 - August 13, 2020