The federal estate tax is unified with the gift tax, and they both carry a maximum 40% rate. So, you can’t just give gifts of significance to others in a tax-free manner to avoid the estate tax.
When you think about the word “gift” you naturally envision a direct transfer of something. However, in the realm of taxation funding certain types of irrevocable trusts can be construed as taxable gifting by the IRS.
With the above in mind you could choose to place your home into a qualified personal residence trust. It would become the property of a beneficiary that you choose when you create the trust after the term of the trust expires.
This removes the home from your estate, reducing your estate tax exposure. However, the funding of the trust is an act of taxable gift giving.
If the gift is taxable, why would you want to place the home into the trust in the first place? The answer is because the value of the gift for tax purposes will be significantly less than its actual fair market value.
This is because you are retaining interest in the property while you live in it for a period of time that you determine when you draw up the trust agreement. So on day one of the execution of the agreement the beneficiary is really not receiving a gift that is equal to the full value of the home because he or she can’t occupy it or sell it.
If you would like to learn more about these trusts take a moment to contact our firm at (563) 445-7400 to arrange for a free consultation.