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Homeowners Tax Breaks Yor complete Guide to finding hidden gold in your home - Lassers J.K.

Lassers J.K. Homeowners Tax Breaks Yor complete Guide to finding hidden gold in your home - Wiley Publishing, 2004. - 258 p.
ISBN 0471444332
Download (direct link): lassershomeownerstaxbreaks2004.pdf
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Gift Tax Pointer. If the gift in the example was given by parents who “split” the gift of interests in the vacation home equally among three children, the entire amount of the $60,690 gift would fit within the annual exclusions available to the parents (3 x $22,000 = $66,000), so that no part of either parent’s lifetime exemption would have to be used up to eliminate gift tax on the gift. This saves the parents’ full exemption amounts for later use. Married individuals can make “split” gifts regardless of which of them owns the property to be given away. If the amount of the gift was larger and the parents wanted to cover the gift entirely with their annual exclusions, they could divide it into two parts, giving one part immediately and the second part in the following year. The gift tax exclusions are annual exclusions. The effect of this would be to double the exclusions available for the gift from $66,000 to $132,000 (2 x $66,000).
That’s the way the rich do it.
Observation
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Additional Attraction of Plan. There is another feature of the vacation home gift idea that can be attractive to parents: It doesn’t require the transfer of cash or an interest in a business. Accordingly, it may especially appeal to parents who are reluctant to make gifts of cash or business property.
REDUCING ESTATE TAX ON HOME 187
10.6 Estate Planning for a Parent’s Home:
Using Sale-Leaseback to Shift Appreciation in Value
Like other assets, personal residences of parents with sufficiently large estates may be subject to heavy estate taxes. The tax burden may be particularly severe for homes owned by widows and widowers.
When a parent dies, leaving the marital abode to his or her surviving spouse, the estate tax marital deduction shields the entire value of the home from estate tax. But it is a different story when the surviving spouse dies. Since the marital deduction is available only for property passing to a surviving spouse, no marital deduction for the value of the home is available to the estate of a widow or widower.
The federal estate tax on estates with a value above the lifetime exemption amount ranges from 18 percent to 48 percent in 2004. (The lifetime exemption amount is discussed in Section 10.3.) If a parent will have an estate substantially in excess of the lifetime exemption amount, it may be appropriate to consider some estate planning for the parent’s residence.
There are two approaches to mitigating the impact of estate taxes on a personal residence, both of which usually involve a transfer of the residence, sooner or later, to children. The first, the sale and leaseback with children, discussed in this section, may serve to remove future appreciation in the value of the residence from the grasp of the estate tax. For example, if a home now worth $500,000 appreciates in value to $1 million at the date of a parent’s death, it may be possible to avoid tax on the $500,000 in appreciation with a sale-and-leaseback transaction.
The second approach is use of a qualified personal residence trust. With this approach, the residence is placed in a trust, under the provisions of which the parent continues to occupy the house for a period of years, after which the residence passes automatically to children. This approach, which may serve to entirely remove the residence from the grasp of the estate tax, is discussed in Section 10.7.
The approach chosen will depend on the personal preferences of the parents.
Why a Sale and Leaseback? If a parent’s home appreciates in value between the present and the date when the parent dies, the parent’s estate tax liability may increase beyond its present level. This is because, in addition to the present value of the home, the appreciation in value of the home also will be included in the parent’s estate for estate tax purposes, increasing the estate tax bill. In other words, both its current value and any appreciation over its current value will be subject to estate tax.
188 RETIREMENT BENEFITS AND ESTATE PLANNING
A sale-and-leaseback transaction may serve to avoid this problem. To illustrate, suppose a parent enters into a sale-and-leaseback transaction with a child, under which the parent sells the parent’s home to the child, then rents it back from the child and continues to live in the home as a tenant. The parent lends the child the money required to purchase the home.
With this sale-and-leaseback arrangement, the parent can transfer the home to the child even though the parent continues to live in the home for life. Assuming the transaction is properly structured, when the parent dies, the home is not included in the parent’s estate for estate tax purposes. Instead, the parent’s estate includes only the amount of the balance of any unpaid purchase price that the child owes the parent at the time of the parent’s death. Thus, appreciation in the value of the home escapes estate taxation in the parent’s estate.
The Family Situation. Estate planning for a parent’s residence should take the family aspects of any proposed transaction into account. In many cases, a parent will have no interest whatsoever in parting with ownership of the home, regardless of tax savings. Or it may be that there are children who will not share the view that estate tax savings is such an important goal. There could be a variety of other personal factors that make this estate-planning idea inappropriate. Accordingly, the plan, and the personal residence trust discussed in the next section, should be considered only if it will not cause significant family problems. If family considerations are no problem, then the tax-saving features of the plan warrant consideration.
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