If you are a homeowner who is exposed to the estate tax, you may want to consider reducing the taxable value of the property by placing it into a qualified personal residence trust.
The funding of the trust with the home is going to remove the home from your estate, reducing your estate tax exposure. However, this is not the point of the strategy because when you fund the trust, you are giving a taxable gift to the beneficiary.
The gift tax is unified with the estate tax, and it too carries a 40% maximum rate in 2013.
Tax savings are realized because you are retaining interest in the home after placing it into the trust.
As the grantor, you retain interest because you determine how long you want to continue living in the home rent-free when you are drawing up the trust agreement.
The beneficiary does not assume ownership of the property until after the term of the trust has expired.
Because of the interest that you are retaining in the home, the value of the home for tax purposes is going to be set far lower than its real fair market value, and this is the reason why people utilize qualified personal residence trusts to gain tax efficiency.
When you hear about this type of trust, you understand why it is so important to talk to a highly qualified estate planning lawyer when you are making arrangements for the future.
It is unlikely that the typical layperson is going to be aware of all the possibilities that exist. If you don’t tap into expert advice, you may be overlooking something that could help you preserve your wealth for the benefit of your loved ones.