Many people are truly amazed when they hear about the details of the federal estate tax. For one thing, this is a tax that is only imposed on some people and who they are varies in a rather random manner.
This is due to the fact that there is an estate tax exclusion, the amount of which changes regularly. At the present time it stands at $5 million, but under current laws when 2013 rolls around the estate tax exclusion will go down to just $1 million.
Right now the rate of the tax is 35%, but in 2013 it is scheduled to go up to 55%. So if you pass away on New Year’s Eve in 2012 with $5 million your family will pay no estate tax on the federal level. But if you pass away on the next day with the same $5 million, $4 million of that will be taxed at a rate of 55%.
As you can see, it is very important to be proactive about gaining estate tax efficiency. If your home is pushing your estate above the exclusion amount, you may want to consider the creation of a qualified personal residence trust.
With these trusts you name a beneficiary who will inherit the property eventually and you state a term during which you will continue to live in the residence. By creating the qualified personal residence trust you remove the value of the home from your estate.
The taxation does not end there unfortunately. There is a gift tax in place that carries the same rate as the estate tax, and funding the trust would constitute a taxable gift.
However, this strategy is effective because the taxable value of the home is reduced by the interest that you retain in it during the period of time that you reside there after placing it into the trust. In the end the taxable value will be much less than the fair market value of the home, and considerable tax savings will be the result.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
- What You Need to Know about the Medicaid Look-Back Rule - January 3, 2023
- How to Pass Down Your Legacy in Your Estate Plan - October 3, 2022
- Practical Steps to Take after Receiving a Terminal Diagnosis - September 30, 2022
