Reduced home values and low interest rates work in your favor when it comes to two strategies that could save your heirs a bundle on estate taxes.
As part of the American Taxpayer Relief Act passed in January, Congress has permanently set the federal estate tax exclusion amount at $5 million, indexed each year for inflation. In 2013, the amount each individual can exclude from estate taxes is $5.25 million. In addition, "portability" became a permanent part of the estate tax, so when one spouse dies, the other can take the unused portion of the exemption and apply it to his or her own estate.
The high exclusion amount means only the very rich will need to worry about saving estate taxes. But among those with wealth primarily concentrated in their home or investment portfolio, there are two types of trusts designed to transfer wealth to heirs and save taxes by removing the assets from the estate. In effect, this reduces the amount of the decedent’s taxable wealth.
One is a grantor retained annuity trust, or GRAT, typically used to shelter future appreciation of stocks. The other is a qualified personal residence trust, or QPRT, that will shelter current and future appreciation on the value of your home. Both are set up for a predetermined term of years, and in both cases, the creator of the trust must outlive the term, or the assets go back into the estate.
Shielding Your Assets From Estate Taxes | Fox Business