There are those who have heard that the estate tax is something that they don’t have to worry about because it is a levy that is only imposed on “the rich.” This kind of thinking can get you into trouble because that definition can sometimes be extended to people who do not consider themselves to be wealthy at all.
At the present time the estate tax exclusion is $5 million, so only the portion of your estate that exceeds this amount is subject to the estate tax, which is carrying a 35% rate at present. However, if there are no changes made to existing laws in the meantime, the estate tax exclusion is going to be reduced to just $1 million in 2013 and the maximum rate of the tax is going up to 55%.
You don’t have to be truly rich to have total assets that exceed $1 million, especially if you include the value of your home. So, there are those who would be able to stay within the exempt amount if they could somehow remove the value of their homes from their estates. This can sometimes be done through the creation of a qualified personal residence trust.
You place the home into the trust and you name beneficiaries who you would like to see inherit it eventually. But you continue to live in the home rent-free for a period of time that you state when you draw up the trust agreement. By doing this you remove the home from your estate for estate tax purposes, but it is considered to be a taxable gift.
But the value of that gift is reduced by the interest that you retain in the home while you continue to live there. This value will be much less than the fair market value of the home, and if it is within the lifetime gift tax exclusion, the home will have been transferred 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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