The estate tax is repealed for 2010, but when it was last in effect back in 2009, the exclusion was $3.5 million. The exclusion stood at $2 million from 2006 through 2008. In 2011 the estate tax exclusion is going to be just $1 million, so a lot of estates that had been under the exclusion for years are now going to be exposed to the estate tax.
Home ownership has long been the foundational wealth building vehicle in the United Estates, and many of the people who are now going to be exposed to the estate tax would say that the worth of their homes is what is causing the overall value of their estates to exceed the $1 million estate tax exclusion. For these individuals, an instrument known as a qualified personal residence trust, or QPRT, may provide the solution.
To implement this estate planning strategy you place your home into a special trust trust and you name your children, or whoever it is that you want to leave the property to, as the beneficiaries. When you are drawing up the trust agreement you state a term during which you will continue to live in the house rent free. Upon transfer to the trust, the value of the home is removed from your estate and your children will assume ownership of the property after the term expires, at which time you would begin paying rent to live in the home.
The funding of the trust with the house is subject to the gift tax, but the IRS does not use the fair market value of the home at that time to calculate its taxable value. They reduce the value of the home by the interest that you are retaining while you are still living in it rent free after you placed it in the trust. Assuming the value of your home appreciates at a reasonable rate moving forward (say, 3%), this techniques can provide a fair amount of gift and estate tax planning leverage.
Feel free to contact our office if you would like a consultation on how a QPRT may benefit you.