There are those who go forward unconcerned about the estate tax because they have heard that it is something that only applies to the very wealthy. Just how true this is will depend on your definition of “very wealthy.”
In fact, when 2013 arrives you really don’t have to be a powerful tycoon to find yourself in possession of resources that exceed the estate tax exclusion amount, especially if you include the value of your home.
Next year the estate tax exclusion is going down to just $1 million (from the current $5.12 million), so when you factor in the value of your residential property you could easily exceed this figure without considering yourself to be truly rich.
Home ownership has traditionally been the foundation of wealth building in the United States. You purchase your first home and move up the ladder as you build equity and your financial situation improves over the years. Many people view their homes as a receptacle of their accumulated wealth.
Because of this your home may well be your most valuable asset.
It is possible to reduce the taxable value of your home in preparation of transferring it to a beneficiary. You can do this by placing the property into a qualified personal residence trust.
Because you continue to live in the home after placing it into the trust you are retaining interest in it. While the eventual transfer of the property to the beneficiary is considered to be a gift that is taxable, the value of this gift for tax purposes is greatly reduced because of your retained interest.
If the taxable value was indeed within the estate tax exclusion you would be able to transfer the property to your beneficiary entirely free of taxation.