When the tax relief act was passed at the end of last year many people in the estate planning community were pleased to see some slight improvements in the estate tax parameters. At the present time the estate tax exclusion is $5 million and the maximum rate of the tax is 35%. What this means is that your estate is not subject to federal taxation if its value is $5 million or less. Any portion of your estate that exceeds $5 million in value is exposed to this 35% levy.
Before you move on secure with the knowledge that your estate is worth less than $5 million you would do well to consider the fact that the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is going to expire at the end of 2012. As things stand at the present time the estate tax exclusion is going to be just $1 million in 2013, and we will be looking at the same 55% maximum rate that was in place in 2001. So the reality is that your heirs may well be faced with the prospect of a 55% federal death levy if you live beyond 2012 and your estate exceeds $1 million in value.
You may analyze your assets and recognize that it is your home that is driving the value of your estate over the estate tax exclusion amount, and if this is the case you may want to consider the creation of a qualified personal residence trust. When you create the trust you name a beneficiary and you set a term during which you will remain in the home as usual. By creating the trust you remove the home from your estate for estate tax purposes. At the end of the term the beneficiary assumes ownership of the property.
The placement of the home into the trust is considered to be a taxable gift, but the IRS reduces its taxable value by the interest that you retain in the home while you remain living in it. So the taxable value of the home will be far less than its true fair market value. This strategy is completely successful when that value is ultimately less than the gift tax exemption that is available to you. Should this be the case no tax will be applicable upon the transfer of the property to your beneficiary after the term has expired.
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