When you are planning your estate one of the first things to establish is whether or not you are going to be exposed to the estate tax.
On the federal level the amount of the estate tax exclusion is $5.25 million in 2013. Anything that is deemed taxable that exceeds this amount is subject to a 40% estate levy. In Connecticut we have an estate tax on the state level as well, and the exemption amount for this tax is just $2 million.
You have to understand the fact that the value of your home is absolutely considered to be a part of your estate for tax purposes. Because your place of residence may be your largest single asset its value may be pushing your estate into taxable territory.
One way to reduce the taxable value of the home would be to place it into a qualified personal residence trust.
You name a beneficiary who would inherit the home at the end of the trust term. This is considered to be a gift to the beneficiary, and the gift tax is applicable. However, the actual taxable value of the gift is going to be far less than the real fair market value of the property.
This is because you retain incidents of ownership by continuing to live in the home for a prescribed period of time that you choose when you draw up the trust agreement. If you live in the home for 20 years you are retaining more interest than you would if you stayed there for just 10 years, and the taxable value of the gift would be lower as a result.