There are some people who hear about the topic of estate planning and question what there is to plan about. How hard can it be to decide who I want to leave my assets to and then simply leave behind directions that make this happen?
The answer is that transferring the assets may not be the most challenging part of the equation. The trick is to do so without losing anything in the process, and there are some significant sources of asset erosion that exist. You want to make sure that you maximize your legacy so that your loved ones receive all that they are entitled to, and this can sometimes require intelligent advance planning.
The estate tax is the source of asset erosion that is most significant, and whether or not you are exposed to it is determined by the value of your estate in comparison to the estate tax exclusion. Right now the estate tax exclusion is $5 million, but it is scheduled to be reduced to just $1 million at the beginning of 2013. So, if you do face exposure you would do well to take steps to gain estate tax efficiency.
One way this can be done is through the creation of a qualified personal residence trust or QPRT. You fund the trust with your home and name beneficiaries who will assume ownership of it at the end of the trust term. By doing this, you remove the value of the home from your estate and gain estate tax efficiency in the process. But, you continue to live in the home for an interim that you determine when you set up the trust.
However, the act of funding the trust constitutes a taxable gift according to IRS regulations. The savings lie in the fact that the taxable value of the property is reduced by the interest that you retain while living in the home. This value will be considerably less than the actual market value of the property. If the taxable value is less than the gift tax exemption that is available to you, the transfer of property will have taken place tax-free.