To be properly prepared for the future you must keep tabs on the value of your resources. The federal estate tax sits poised to consume a large chunk of your legacy and it is important to stay abreast of your potential for exposure.
This is a very big deal right now because there are changes afoot that will impact a great many Americans at the end of this year. In 2013 the estate tax exclusion will be reduced from the $5.12 million that we are working with at present to just $1 million. The maximum rate of the tax will shoot up to 55%; it currently sits at 35%.
Your home counts as part of your estate for tax purposes. So, let’s say your home is worth $700,000 and you have $600,000 worth of additional resources. Next year the first $1 million could pass to your heirs tax-free. But that $300,000 that you have that exceeds the $1 million exclusion amount would be taxable at a rate of 55%.
In this type of scenario you could choose to place the house into a qualified personal residence trust. You name a beneficiary who would assume ownership of the property after the term expires. Presumably this would be the same individual who would inherit the home if you simply left it within your estate.
When you fund the trust with the home you take it out of your estate for tax purposes. Because the beneficiary will someday receive the home as a gift the gift tax is applicable. But, the taxable value of this gift is greatly reduced because you are retaining interest in the home while you live in it throughout the trust term.
In the end the taxable value will be much less than the full market value of the property.
The suggestion here is to carefully assess the value of your resources including your home as 2013 approaches. If you find that you are in or near taxable or territory you are going to want to discuss estate tax efficiency strategies with a good Cleveland trust attorney.