Nanci Kushner: Addressing Tax Concerns

Nanci Kushner has retired from her career as a grade school teacher, and she currently resides in Cresskill, New Jersey. This is a very desirable community that is about 20 miles from New York City. According to the real estate website Trulia.com, the median sale price for a home in Cresskill, New Jersey is approximately $680,000. Given this reality, many people who live in the borough are quite wealthy, and the federal transfer taxes could be a factor for them. At the time of this writing, we have a federal estate tax in place, and there is also a gift tax. These taxes are unified under the tax code, and they come with a 40 percent maximum rate.

Nanci Kushner

There is a federal estate tax exclusion that allows you to transfer a certain amount of money and/or property to others before the estate tax would be applicable. Each year, there are adjustments to account for inflation, but at the present time, the exclusion is $5.45 million. Transfers to anyone, even your children, are potentially taxable, but there is one exception. We have an unlimited marital gift and estate tax deduction in the United States. You can utilize this deduction to transfer unlimited assets to your spouse free of taxation, as long as you and your spouse are American citizens.

Cresskill residents like Nanci Kushner can implement strategies to minimize the impact of estate taxes. Irrevocable trusts of various kinds are often utilized, and one of them is the qualified personal residence trust.

To implement this strategy, you convey your home into the trust, but your life is not disrupted. You can continue to live in the home for a period of time that you determine. You name a beneficiary, and after the expiration of this term, which is sometimes called the retained income period, the beneficiary would assume ownership of the home. When you place the home in the trust, you are removing it from your estate for tax purposes, but the transfer to the beneficiary would constitute a taxable gift.

At this point, you may wonder why this is an effective strategy if the transfer is going to be subject to taxation anyway. It is useful because the value of the home for tax purposes will be far less than its actual fair market value. This is because of the retained income period. Let’s say that you remain in the home for 15 years after you establish the trust. No neutral buyer would pay full price for a piece of property that they could not occupy for 15 years, and the IRS adjusts the taxable value of the gift to account for this dynamic. This is a strategy that Cresskill residents like Nanci Kushner who may have estate tax concerns can discuss with their tax advisers.

Reference: https://www.trulia.com/real_estate/Cresskill-New_Jersey/