Watching your home’s value rise is a great feeling, and in many areas, property prices have surged dramatically over the past decade. While this is positive for homeowners and investors, it can also result in significant estate tax liability.
Federal Estate Tax
Your real property is part of your taxable estate, so increases in property value can affect your estate tax liability. The relevance depends on the overall value of your estate, thanks to the estate tax exclusion, which allows you to transfer a certain amount before the tax applies to the remaining portion.
In 2011, a $5 million exclusion was established, indexed for inflation through 2017, reaching $5.49 million that year. The Tax Cuts and Jobs Act of 2017 doubled the exclusion and added an inflation adjustment, resulting in an $11.18 million exclusion in 2018. This year, the exclusion stands at $13.61 million.
Married Couples
Married couples have specific advantages regarding estate taxes. Spouses can transfer unlimited assets to each other tax-free if they are U.S. citizens. Additionally, a surviving spouse can use the unused portion of their deceased spouse’s exclusion, a provision known as “portability.”
Gift Tax
Lifetime gift-giving is not a complete solution for estate tax efficiency, as there has been a gift tax in place since 1932. The estate and gift taxes are unified, sharing a unified exclusion that applies to both your estate and lifetime gifts.
However, you can transfer up to $18,000 each year to an unlimited number of recipients tax-free. You can also pay others’ school tuition and medical bills tax-free under separate exclusions.
Estate Tax Exposure
Significant increases in property values could push your estate into taxable territory. The Tax Cuts and Jobs Act’s record-high exclusion will expire at the end of 2025, reverting to $5.49 million indexed for inflation in 2026 unless legislative changes occur.
For example, the median listing price for a home in Westport, Connecticut, is $2.6 million, according to Realtor.com. Many residents in high-value areas must prepare for the upcoming reduction in the estate tax exclusion.
State-Level Estate Tax
In Connecticut, there is also a state-level estate tax, with the exclusion matching the federal level at $13.61 million this year. Connecticut also imposes a state gift tax, adding another layer of consideration.
Estate Tax Efficiency Strategies
Several strategies can help mitigate estate tax exposure, with irrevocable trusts often playing a key role. One effective strategy for homeowners is the Qualified Personal Residence Trust (QPRT).
With a QPRT, you transfer your home to the trust, naming a trustee and beneficiary, and establish a period during which you retain the right to live in the home. This retained interest period reduces the taxable value of the gift, as the IRS calculates the gift value based on the current home value and the length of the retained interest period. Consequently, the taxable value of the home is significantly lower than its future value when transferred to the beneficiary.
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If you’re ready to create an estate plan, schedule a consultation with us. You can also use the contact form on our site to send us a message, and we will respond promptly.
For personalized guidance and effective estate tax planning, contact the Law Offices of Charles L. Kurmay. Our experienced attorneys are here to help you navigate the complexities of estate taxes and protect your assets.
