Key Points:
- Transferring your house to a trust does not automatically avoid inheritance tax.
- However, trusts can be used as part of a comprehensive estate plan to minimize or eliminate inheritance tax liability.
- There are different types of trusts that can be used for this purpose, including revocable living trusts, irrevocable trusts, and qualified personal residence trusts (QPRTs).
- The specific tax consequences of transferring your house to a trust will depend on the type of trust used and the specific circumstances of your estate.
Understanding Inheritance Tax
Inheritance tax is a tax on the value of property that you inherit from someone who has died. In the United States, inheritance tax is imposed at the federal level and in some states.
The federal inheritance tax is known as the estate tax. The estate tax is imposed on the value of an individual’s estate at the time of their death. The estate tax exemption is currently $12.92 million for individuals and $25.84 million for married couples. This means that estates valued below these amounts are not subject to estate tax.
Some states also have their own inheritance taxes. State inheritance taxes vary in terms of their rates and exemptions.
Using Trusts to Avoid Inheritance Tax
Trusts can be used as part of a comprehensive estate plan to minimize or eliminate inheritance tax liability. There are different types of trusts that can be used for this purpose, including:
- Revocable living trusts: A revocable living trust is a trust that you create during your lifetime. You can transfer assets to the trust, and you retain the right to change or revoke the trust at any time. Revocable living trusts do not avoid inheritance tax, but they can be used to simplify the probate process and avoid the need for a court-appointed administrator to manage your estate.
- Irrevocable trusts: An irrevocable trust is a trust that you create during your lifetime and that cannot be changed or revoked once it is created. Irrevocable trusts can be used to avoid inheritance tax by removing assets from your estate. However, you give up control of the assets once you transfer them to an irrevocable trust.
- Qualified personal residence trusts (QPRTs): A QPRT is a type of irrevocable trust that is specifically designed to hold a personal residence. QPRTs can be used to avoid inheritance tax on the value of your home. However, you must meet certain requirements to qualify for a QPRT.
Specific Tax Consequences of Transferring Your House to a Trust
The specific tax consequences of transferring your house to a trust will depend on the type of trust used and the specific circumstances of your estate.
- Transferring your house to a revocable living trust: Transferring your house to a revocable living trust does not avoid inheritance tax. However, it can simplify the probate process and avoid the need for a court-appointed administrator to manage your estate.
- Transferring your house to an irrevocable trust: Transferring your house to an irrevocable trust can avoid inheritance tax by removing the value of your home from your estate. However, you give up control of the house once you transfer it to an irrevocable trust.
- Transferring your house to a QPRT: Transferring your house to a QPRT can avoid inheritance tax on the value of your home. However, you must meet certain requirements to qualify for a QPRT.
Transferring your house to a trust can be a useful estate planning tool. However, it is important to understand the specific tax consequences of transferring your house to a trust before you make a decision. You should consult with an estate planning attorney to discuss your specific needs and goals.
How to AVOID Inheritance Tax! | Property Investment Trusts 101
FAQ
Do trusts get around inheritance tax?
What is the best trust to avoid estate tax?
Is property inherited from a trust taxable?
Can a trust avoid inheritance taxes?
There’s a big misconception out there about trusts and what they can (and cannot) do for an estate. A lot of people think that trusts can be used to avoid inheritance taxes – but that’s not actually true. Trusts can be used to minimize (and sometimes avoid) estate taxes. However inheritance taxes are not the same thing.
How can I avoid inheritance tax?
To avoid the inheritance tax, you can make it so that your estate covers the tax and your beneficiary is free from paying it. An irrevocable trust may also help you avoid death taxes, but there may be other taxes that need to be paid.
Can a trust reduce estate taxes?
Trusts have a multitude of other uses. With the right planning and some experienced legal guidance, you can use certain kinds of trusts to minimize your estate taxes and protect your assets from or misuse.
Is a house in a trust a taxable estate?
When your house is in a trust, it may not form part of your taxable estate. Nevertheless, there are important things to think about such as what type of trust to use and any taxes you might need to pay. Trusts can be really helpful, but they can also be a bit tricky.