The federal estate tax is a source of concern for high net worth individuals. This tax can take a hefty bite out of the wealth that you are leaving behind to those that you love. At the present time, the maximum rate of the federal estate tax is set at a rather robust 40 percent.
There is a federal estate tax credit or exclusion that you can use to leave tax-free bequests. Anything that you leave behind that exceeds the amount of this exclusion is potentially subject to taxation. During the current calendar year, the precise amount of the federal estate tax exclusion is $5.34 million.
It is important to inventory your assets with possible estate tax exposure in mind. When you are doing so, you should understand the fact that your home is part of your taxable estate. You must include its value when you are attempting to determine your estate tax liability.
Your home may well be your most valuable asset. You could probably gain a great deal of estate tax efficiency if you could reduce its taxable value. This can potentially be done through the creation of a qualified personal residence trust.
QPRT for Tax Savings
To implement this strategy, you fund the qualified personal residence trust with your home. When you do this, you are removing your home from your estate for estate tax purposes.
In addition to the estate tax we have a gift tax, and it is unified with the estate tax. The $5.34 million exclusion encompasses gifts that you give that are taxable along with the value of your estate.
When you create the trust agreement, you name a beneficiary who will assume ownership of the home after the term of the trust expires. Because there is a beneficiary who will eventually assume ownership, you are giving a taxable gift.
You decide on a term called a retained income period when you are drawing up the trust agreement. During this interim you remain in the home as usual. The beneficiary does not assume ownership until after this term has expired.
Because of this retained income period, the taxable value of the gift is much lower than the fair market value of the home. After all, a buyer would not pay full price if he or she could not occupy the home for 10 or 15 years.
After the term of the trust expires, the beneficiary assumes ownership of the home. The gift tax is applicable, but the tax burden will be far less than it would have been if you had left the home to the beneficiary directly.
Wealth Preservation Consultation
A qualified personal residence trust can be part of the plan if you are looking for tax efficiency strategies. If you would like to learn more, contact our firm to request a free consultation.
