How can I leave my home to my kids without them getting killed by estate taxes on the inheritance?
If you’re going to leave your kids more than $2 million, they’re going to end up paying estate taxes on their inheritance. While this used to be just a “rich people” concern, the rise in real estate prices has been so high over the past decades that now the family home might tip you over.
One tax planning strategy to consider is the creation of qualified personal residence trust, where you put your home in a trust but retain the right to live there during a specified time-frame — say 15 years.
During that time, you’re responsible for the repairs and maintenance on the house, but the value of the house is reduced, for accounting purposes. So your $2 million home might be counted as being worth just $1 million to your kids.
What happens if you outlive the trust period? You end up paying market-rate rent to your kids, so don’t forget to plan for that contingency.
On the other hand, if you die during the trust period, the effects of the trust are wiped out, so it makes sense to pick a shorter rather than longer term if you’re chasing this kind of tax loophole.