The estate tax in 2011 is going to impact a lot of people who didn’t have to be concerned about it previously, and it is important to understand the ramifications of the tax. Many people are under the impression that the estate tax is only levied on “the rich” due to the exclusion amount, but this has never been the case and it is certainly not going to be the case in 2011.
The estate tax was repealed for 2010 due to some provisions in what are commonly called the “Bush tax cuts,” but the last year that the tax was in effect, 2009, the exclusion amount was $3.5 million. This means that if your estate was valued at less than this amount you paid no estate tax, and if it was valued at more than $3.5 million only the portion that exceeded the exclusion was subject to the tax. In 2011, that exclusion amount is going to be just $1 million.
Many would argue that a couple who have accumulated $3.5 million in total assets throughout their lives should not be compared with the Warren Buffets of the world for tax purposes. But now that the estate tax exclusion stands at $1 million, it is clearly not the domain of the wealthy. So, the solution is to reduce the value of your estate in an effort to stay under that exclusion amount.
One way to do this is through the creation of a QPRT or qualified personal residence trust. You place your home in the trust and you make your heirs, presumably your children, the beneficiaries. You can then live in the house rent-free for a term that you elucidate in the trust agreement. At this point your home is no longer a part of your estate for tax purposes unless you were to die before the term expired.
The funding of the trust with the home is subject to the gift tax, but the taxable value of the property is reduced by the donor’s retained interest in it. So, if that value is less than the lifetime gift tax exclusion of $1 million, the home will ultimately change hands free of both estate and gift tax liability.