The housing market has been white-hot for a number of years, and this has put a smile on the faces of investors and ordinary homeowners. Wealth building is a very good thing, but there is a looming threat from an estate planning perspective.
Federal Estate Tax
If you have enjoyed a great deal of financial success, you have to be concerned about the federal estate tax. It carries a 40 percent top rate, and it is applicable on transfers that exceed $11.7 million in value. This figure is called the exclusion, and it is indexed annually to account for inflation.
It is at a record high because a provision contained within the Tax Cuts and Jobs Act of 2017. This provision is going to expire at the end of 2025, and in 2026, the exclusion will plummet to $5.49 million.
To make matters worse, a piece of legislation called the Tax Cuts and Jobs Act has been introduced by Senator Bernie Sanders. There is a provision in the bill that would reduce the estate tax exclusion to $3.5 million, and it would increase the rate.
There are some concessions made for married couples. You can transfer any amount of property to your spouse tax-free manner because there is an unlimited marital deduction. However, you cannot use this deduction if you are married to someone that is a citizen of another country.
The estate tax was made portable when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted. This means that a surviving spouse could use their exclusion and the exclusion that could have been used by their deceased spouse.
New York is one of 12 states in the union with a state-level estate tax, and the exclusion is $5.93 million this year. The rate is a graduated rate that maxes out at 16 percent.
If your home and any other real estate that you own has been increasing in value, you may have estate tax concerns. You should definitely keep yourself up-to-date with regard to the value of your property relative to the state and federal exclusions.
You cannot give lifetime gifts to get around the estate tax because there is a gift tax in place that has been around 1932. In 1970s, the gift tax and the estate tax became unified under the tax code, and this means that the $11.7 million exclusion is a unified exclusion.
If you were to give taxable gifts valued at $11.7 million while you are living and you die this year, the entirety of your estate would be subject to the federal estate tax.
There is no gift tax in New York, but there is a three year claw-back provision. Gifts that you give within three years of your passing are considered to be part of your estate for tax purposes.
Qualified Personal Residence Trust
There is a solution that can be implemented to facilitate the transfer of your home in a tax efficient manner. You can convey the property into a qualified personal residence trust, and you name a beneficiary that will assume ownership of the property when the term expires.
The home will no longer be part of your estate for tax purposes, but the transfer to the beneficiary that will take place eventually will be looked upon as a taxable gift by the IRS.
When you establish the trust, you decide on a retained income period. This is a prescribed period of time during which you live in the home as usual rent-free, so your life is not disrupted in any way.
The IRS determines the taxable value of the gift with the understanding that no reasonable buyer would pay the full price for a home that was occupied by someone else for five or 10 years. As a result, the taxable value of the home will be much lower than the actual value on the open market.
Schedule a Consultation Right Now!
We can definitely help you implement as estate tax efficiency strategy if taxation is a source of concern, and we can provide assistance if your estate will not be subject to estate taxes.
If you are ready to get started, you can schedule a consultation at our Smithtown, NY estate planning office if you call us at 631-265-0599. There is also a contact form on this site you can use if you would prefer to send us a message.