When you are evaluating any potential estate tax exposure you may have, you should understand the fact that the value of your home is certainly going to count.
Who Is Exposed?
How do you know if you are exposed to the estate tax or not? There is a federal estate tax exclusion or credit. In 2014 the amount of this exclusion is $5.34 million.
A base of $5 million was put into place for the 2011 calendar year. It is annually adjusted for inflation. Next year you may see a slightly higher figure after another inflation adjustment is applied.
If your assets do not exceed $5.34 million in value, you would not be exposed to the federal estate tax. Assets that you want to transfer that are in excess of this figure would potentially be subject to this death levy that maxes out at 40 percent.
Qualified Personal Residence Trusts
Now, let’s get back to the subject of home ownership as it applies to the federal estate tax. Because your home may well be your most valuable possession, reducing its taxable value could save your heirs a lot of money if you are exposed to the estate tax.
One way that this could potentially be done is through the creation of a qualified personal residence trust.
Estate planning devices that are of an advanced nature are complicated. If you want to learn about qualified personal residence trusts in detail and have all of your questions answered, you would want to arrange for a consultation with a licensed estate planning attorney.
This having been stated, we will provide a basic explanation here.
If you create a qualified personal residence trust, you are called the grantor. You convey the home into the trust and you name a beneficiary. Let’s say that you choose your daughter to be the beneficiary.
Once you have conveyed the property into the trust, it is no longer part of your taxable estate.
When you create the trust agreement, you decide on a term during which you will remain in the home as usual. Your daughter would not assume ownership of the home until the expiration of this term. As a result, your life doesn’t change immediately after you create the trust. You remain in your home as usual, living rent free.
Because your daughter will eventually be assuming ownership of the home, the act of conveying the property into the trust is looked upon as an instance of taxable gift giving by the IRS. However, the taxable value of the gift is going to be much less than the true fair market value of the home.
This is because you are retaining incidents of ownership while you continue to reside in the home. After the term expires, your daughter would assume ownership at a tax discount.