The most significant source of asset erosion is the estate tax. Right now the rate of the tax is 35%, and the exclusion sits at $5 million. So, if the overall value of your estate is less than $5 million you don’t have anything to worry about, right? This is not exactly true, because these parameters are not etched in stone. In fact, when the tax relief bill that was passed at the end of last year expires at the end of next year, the rate of the estate tax is going to increase to 55% and the estate tax exclusion is going to be reduced to just $1 million. (It should be mentioned that it is possible that new legislation could be passed between now and then that changes these numbers.)
Many people would say that it is their home that is pushing the value of their estate into taxable territory. One response would be the creation of a QPRT or qualified personal residence trust. You place your home into the trust and name your beneficiaries who will assume ownership of the property after the trust term has expired. The act of funding the trust with your home removes its value from your estate for estate tax purposes, but it is considered to be a taxable gift.
You continue to live in the home during the term of the trust, and the taxable value is reduced by the interest that you retain during this period of time. As a result, this taxable value is going to be significantly less than the fair market value of the property. If this value winds up falling within your available gift tax exclusion, the eventual transfer of the home to your heirs will take place in a tax-free matter.
To learn more about how a qualified personal residence trust may fit into your estate plan, simply arrange for a consultation with an experienced estate planning attorney.