When you are planning your estate you may find that like many people, your home is the single biggest asset that you have. Home ownership has long been the key to wealth building in the United States, and your house may well have appreciated quite a bit since you first purchased it three or four decades ago.
Aside from the purely financial aspects of home ownership, there is an emotional component as well. Most people who are planning there estates are passing their legacy along to their children and grandchildren, and your home probably represents much more to these close family members than mere dollars and cents.
Due to the incredibly large bite of the estate tax many people have had to sell the family home that they inherited merely to pay the death tax that was imposed on the transfer. So here you have people in mourning who are taking stock of their childhood memories as they sell off the home they grew up in to pay the IRS.
One way to mitigate the damage and perhaps keep the home in the family is by the creation of a qualified personal residence trust. You place the home into the trust and name your beneficiary and if you live long enough you remove the value of the home from your estate for estate tax purposes. You can continue to live in the home rent-free for a period of time that you determine as stated in the trust agreement.
When the term of the trust expires ownership of the home is assumed by your beneficiary. The gift tax is applicable, but the IRS does not use the full market value of the home to calculate its taxable value. The taxable value is reduced by the interest that you retained in the home while you were living in it, which can result in a 25% – 50% reduction in its taxable value. If this amount is less than the unified gift/estate tax exclusion of $5 million (or any portion of that exclusion that is unused) the home will pass to your heirs free of taxation.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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