Transfer the House to the Children to Avoid Estate Taxes

If the estate tax comes back as planned in 2011, many middle-class Americans will owe estate taxes, mainly due to the value of their homes. One way to avoid this is to transfer your house to your children this year. This year is especially advantageous for this transaction because home values are depressed and expected to bounce back at some point. Further, the gift tax rate for 2010 is 35% and will rise to 55% in 2011.

The biggest hurdle to this strategy is forming a business relationship with family members. If you need to continue living in the house, you have to pay fair-market rent to your children.

Some methods for transferring your house include:

• Give Partial Interests. You can give your house to more than one person all at one time, taking advantage of several annual gift exclusions.
• Use a Grantor Trust. Give your house to a trust that benefits various people.
• Create a Qualified Personal Residence Trust.
• Create a Legal Entity. Place the house in a limited liability company and gradually give away shares to the enterprise.

For more information, including details about all of these strategies, see Deborah L. Jacobs, Leave the Children the House, Without a Hefty Tax Bill, N.Y. Times, Oct. 20, 2010.

Special thanks to Kayleigh M. Scalzo (Editor-in-Chief, Volume 79 The George Washington Law Review) for bringing this to my attention.