FUNDING A BYPASS TRUST WITH THE HOUSE
The house represents an asset of considerable value that will be included in the gross estate of the owner when he dies. With adequate estate planning, estate taxes incurred at the owner's death can be avoided or deferred. Avoidance can be achieved where the estate of an elderly couple is planned to take maximum advantage of the $2 million per person applicable exclusion amount (2008), which increased in 2009 to $3.5 million. There have been proposals to make this amount permanent, but the status is uncertain, and may continue to change in the future as the federal government addresses fiscal issues.
The New Jersey estate tax rules have introduced another wrinkle into this planning by capping the exclusion at a maximum of $675,000 so that funding of a by pass trust beyond that amount will trigger state level estate tax. This "de-coupling" of the New Jersey estate tax from the federal estate tax law can create a substantial estate tax on the death of the first spouse if the full federal exclusion is used to fund a bypass trust (used to benefit the surviving spouse while avoiding inclusion of assets in the surviving spouse's estate). The nuances of this planning are addressed in other chapters, but should be considered when restructuring home ownership to facilitate the funding of a bypass trust. Specifically, if the clients only plan to fund $675,000 of the bypass trust on the first death, they may opt to avoid the additional costs of retitling their residence to use for such purposes and use other assets instead.
For many elderly clients, the home is one of the primary assets available to fund a sizeable portion of an applicable exclusion (bypass) trust under the will of the first spouse to die. To achieve this funding, in many situations, a house that is titled as "husband and wife" (joint tenants or tenants by the entirety) will pass outside of the estate, by operation of law, to the surviving spouse. The value of the house will thus not be available (absent a successful disclaimer) to fund any portion of an applicable exclusion trust. Thus, a common transaction for estate planning for the elderly couple includes re-titling the house from "Jim Doe and Jane Doe, husband and wife" to "Jim Doe and Jane Doe, as Tenants In Common." In some situations the house may be placed solely in the name of one spouse in order to equalize assets available to fund the maximum applicable exclusion amount regardless of which spouse should die first. However, before retitling a house, consider that the asset protection benefits of tenants by the entirety ownership will be lost. Further, the impact to elder law planning issues should be addressed.
Caution rules differ substantially by state and the laws change frequently.
OUTRIGHT GIFTS OF INTERESTS IN THE HOUSE
It might be beneficial to transfer ownership of the house to another relative in order to remove the value of the house from the elderly client's estate. For example, this could be done by simply giving away undivided interests in the house each year through a deed using the annual $13,000 (for 2009, indexed for inflation in later years) per donee gift tax exclusion amounts.
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