In 2013 the estate tax exclusion is $5.25 million. You have to understand the fact that this figure includes the value of your home, so right off the bat you are going to be left with considerably less to work with if you are a homeowner.
Many people would be able to stay within the estate tax exclusion amount if they could somehow reduce the taxable value of their homes. There is in fact a solution for these individuals in the form of qualified personal residence trusts.
When you fund certain types of irrevocable trusts you are giving taxable gifts to the beneficiaries. This is true when you place a home into a qualified personal residence trust and name a beneficiary who would assume ownership of the property after the term expires.
You are removing the home from your estate for estate tax purposes, but you still have to contend with the gift tax which carries the same 40% rate as the estate tax in 2013.
The way that you realize tax savings is by retaining interest in the home. When you draw up the trust terms you state a term during which you will remain living in the residence. This can be five years, 10 years, or whatever length of time you choose.
If you were to sell someone a home that they couldn’t live in for five or 10 years you couldn’t get full market value. Because of this, the gift is not valuated by the IRS for tax purposes at its full market value because you are retaining interest in it.
The house ultimately does become the property of the beneficiary, but the tax burden is significantly reduced over what it would have been if this individual inherited the home directly after your passing.
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