Tax Savings Via Qualified Personal Residence Trusts

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The estate tax has been repealed for 2010, but we are now facing the year's end, and in 2011 it will revert back to the 2002 level of exemption, which is $1 million, with the 2001 top rate of 55% also returning. Regardless of how you feel about the topic of taxation, the prospect of seeing your heirs faced with a tax equation that can result in the government staking claim to a majority share of their inheritances is more than a little bit disconcerting. Since home ownership has long been the cornerstone of wealth building in America, the most valuable asset in many estates is the home of the deceased. So when you connect the dots, as of 2011 if you leave a house to an heir that is worth more than a million dollars he or she will be asked to pay an estate tax of up to 55% of the market value of the property.

This is not an appealing proposition to most homeowners, so estate planning professionals will often suggest the creation of a qualified personal residence trust as an alternative strategy. With these instruments you place the home in a trust and name your heirs as beneficiaries. You can live in the home without paying rent for a term that you include in the agreement, let's say ten years for the purpose of this example. At the end of this ten year term, ownership of the home is transferred to the beneficiaries and the transaction is not subject to estate tax.

This funding of the trust is considered to be a gift, but the actuarial value of the gift is used to determine its taxable value, and this is going to be significantly less than its fair market value. The unified gift and estate tax exemption is $1 million, so if the actuarial value is less than that no gift tax would be due assuming the exemption had not already been exhausted.

As you can see, qualified personal residence trusts can be an enormously effective estate planning tool under certain circumstances, making it possible to transfer ownership of your property to your heirs without assuming the burden of the suffocating federal estate tax.

About the Author:
Saul Kobrick is an attorney licensed to practice law in the State of New York and the owner and founder of The Law Offices of Saul Kobrick, P.C. For more information on residence trusts and other estate planning services, visit our website.



Article Originally Published On: http://www.articlesnatch.com


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