People take varying views on taxation, and of course nobody likes to pay taxes, but there are those who view these levies as necessary evils. However, others would contend that estate taxes are really indefensible. Their argument revolves around being taxed more than once on the same income, and it makes a lot of sense.
When you earn a paycheck or derive income from your business it is taxed. You use some of what is left to pay your mortgage. Let’s say your home is finally paid for after thirty years and it is worth $2 million. If you were to bequeath the house to your heirs in 2011 (the inheritance tax has been repealed for 2010) a federal inheritance tax of 55% of that $2 million would be due. Many would say that a tax exceeding half of the value of your property is excessive. But beyond that, the money that you earned to pay for the house in the first place was the net income that you retained after having paid income tax on your total earnings.
Considering the above, qualified personal residence trusts are useful estate planning instruments that can facilitate the transfer of property to your heirs without being subject to estate tax. The homeowner/grantor places the property in the trust and names a beneficiary or beneficiaries. An agreement is included defining a period of time that the grantor may continue to live in the house rent free, though he or she is responsible for maintenance, taxes and other expenses. When the specified period is up, the home becomes the property of the trust and is thus transferred to the beneficiaries.
There is no inheritance tax levied, but there may or may not be a gift tax due. The value of the house is reduced by the retained interest of the grantor, so it will be considerably less than the fair market value of the property. There is a lifetime gift tax exemption of $1 million, so there would be no gift tax due if this had not been used up and the actuarial value of the house was less than this amount.
Qualified personal residence trusts are useful estate planning tools that make it possible for many homeowners to pass along their homes to their heirs with optimal tax efficiency. If you feel as though this strategy may be beneficial to you, simply contact us through this website to arrange for a free consultation.