When you decide to get serious about planning your estate, one of the first things you need to identify is where you stand in relationship to the estate tax exclusion. As a result of the tax relief measure that was passed toward the end of last year, the estate tax exclusion is now $5 million, and the top rate of the tax is 35%. This means that the portion of your estate that exceeds $5 million in value is subject to a 35% federal levy. It should be mentioned that these figures are only in place until the end of 2012. If no new legislation is passed in the meantime, the estate tax exclusion will be reduced to $1 million, and the maximum rate of the tax will go up to 55%. In addition, the New York estate tax applies to estates that exceed $1 million in value.
You may evaluate the anatomy of your assets and recognize the fact that it is your home that is pushing your estate over the estate tax exclusion amount. If this is the case, you may want to consider the creation of a QPRT, or Qualified Personal Residence Trust. To implement this estate planning strategy, you name a beneficiary, appoint a trustee, and place your home into the trust. When you are creating the trust agreement, you designate a term during which you will continue to live in the home rent-free, so nothing significant changes about your day-to-day life.
The act of funding the trust with your home removes it from your estate for estate tax purposes, but it is considered to be a taxable gift. However, the taxable value of the home is reduced by the interest that you retained in it while you continue to use it as your place of residence. This value is going to be considerably less than the fair market value of the home. If the taxable value winds up being less than the unified estate/gift tax exclusion that is still available to you, the transfer of the property to the beneficiary will take place in a tax-free manner after the term expires.
Michael Robinson, Estate Planning Attorney
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