Taxation is a very big factor to take into consideration when you are preparing your assets for future distribution to your heirs.
There are taxes on asset transfers in the United States, and these death taxes can erode your wealth considerably as it is being passed on to succeeding generations.
The federal estate tax looms large. This tax carries a 40 percent maximum rate. Without question, this is a very significant rate of taxation that can play havoc with your legacy.
If you are thinking that you can give gifts while you are living to avoid the estate tax, think again. There is a federal gift tax in place, and it is unified with the estate tax. If you give gifts while you are living, these gifts can be taxed at the same 40 percent top rate.
Fortunately, there is an estate tax exclusion or credit. This allows you to transfer a certain amount of property tax-free. For the rest of the 2016 calendar year, the amount of the estate tax exclusion is $5.45 million.
We should point out the fact that there is an unlimited marital deduction. You don’t have to use any of this exclusion to transfer assets to your spouse tax-free because of this deduction. Any amount of money and/or property can be transferred to your spouse tax-free, either while you are living, or after you pass away.
Qualified Personal Residence Trusts
If your estate is in taxable territory, you could potentially reduce your exposure through the creation of a qualified personal residence trust. Here’s how it works.
You fund the trust with your home, and you name a beneficiary who will assume ownership of the home after the term of the trust expires. When you do this, you are removing the home from your estate for tax purposes.
However, you are giving a taxable gift to the beneficiary.
When you create a qualified personal residence trust, you set a term that is called the retained income period. During this interim you can remain in the home as usual.
The taxable value of the gift is not going to be equal to the fair market value of the home, because of the retained income period. The value of the gift is not the same as the value of the home, because you are not giving the gift immediately.
As a result, when the transfer does take place, the tax responsibility will be significantly reduced.
Explore Tax Efficiency Strategies
If you would like to learn more about qualified personal residence trusts and other estate planning tools that provide estate tax efficiency, our firm can help.
We offer free consultations to people in our area, and you can send us a message through this page to set up an appointment: Dallas TX Estate Planning Attorneys.