HOW TO AVOID IRS TAX BY LEAVING YOUR PROPERTY TO FUTURE GENERATIONS

Several communities in the United States are having a wonderful time again. According to data from the Seattle house price estimation, house prices in East Hampton, New York City and Beverly Hills rose by about 10% last year (2019). There is a Fisher Island near Miami that is not open to outsiders. The only way to go to the island is by private ferry, and only people on a special list can go there. House prices there have increased by a third about.

Rising house prices are usually a good thing for sellers, but it also involves a cost that many people always forget: when the owner dies, the estate tax on the property may be much higher than the level of a few years ago. In addition, estate taxes have been rising faster than house prices and asset prices, and according to some experts like tax attorneys, there may be further increases. But some legal operations may help buffer this negative impact.

Today’s federal real estate inheritance tax targets properties worth $5.43 million and even more than this, with a maximum tax rate of 40%. Since everyone can leave an unlimited amount of money to their spouses, the actual tax allowance for each couple is $10.86 million. The lowest real estate inheritance tax rate appeared in 2010. Due to the political failure of Congress, the tax type had a one-year gap, and the tax rate for that year was actually zero. Thanks to this, several heirs of billionaires, including the late boss of the New York Yankees, George Steinbrenner, have retained hundreds of millions US dollars.

Of course, this money can’t be saved today. In fact, because the gap between the rich and the poor in the United States is increasing, the inheritance tax rate remains unchanged, and it is likely to be increased if it is changed. In the 1970s, not far from today, the highest federal real estate inheritance tax rate for the wealthiest people in the United States was 77%. If the gap between the rich and the poor continues to widen, today’s 40% tax rate may appear to be too low for future Congress and will have to be raised.

The good news is that there are more loopholes in the federal tax code than a 30-meter-long scarf woven by a group of wounded weavers. Several of these major vulnerabilities may be particularly useful here. The first loophole allows people to transfer property to heirs through a temporary fund called “qualified personal residence trust” (QPRT). This fund can make time for your friend in the estate tax rather than the enemy, because it can greatly reduce the taxable value of the property. As an example: a $10 million worth of dwellings transferred to a heir through a seven-year QPRT will only be taxed as a set of $8.6 million worth of real estate. Because the beneficiary will not be able to get the property until seven years later, the Internal Revenue Service will allow the value of the property to be calculated a few percentage points less every year.

The good news is that once the property is transferred to the heir, all value-added parts will be excluded from the taxable value in the future. For example, if the above-mentioned private island residence increases in value by 7% every year , and you die 10 years later, then in the absence of QPRT, your property as an accepted estate will be taxed at a value of $20 million. With QPRT, the taxable value of the property will be only $8.6 million. In the end, the difference between these is expected to help you save up to $5 million in inheritance tax, depending on your specific situation. Of course, there are some considerations. The most important one is that you must live longer than this trust fund to enjoy this benefit otherwise your own estate will be taxed on the entire value of the residence. In addition, once the property is transferred, it will be owned by your heir, even if you live for another 20 years.

Another little-known strategy is to transfer the property to a limited liability company controlled by the family, and then to send the shares of the limited liability company to the beneficiaries year after year. This can reduce future inheritance taxes in several different ways. First, it is possible to require the inheritance tax to be imposed on the discounted value per share of a limited liability company because it is a minority stake in a non-public company. So, for a $10 million beach mansion in Hampton, although its 1% stake should have been worth $100,000, when calculating the estate tax, it can only be valued at $85,000, or even less. Secondly, according to the federal grant tax allowance, each beneficiary’s annual taxable value can be cut off by another $14,000, which reduces the taxable value of the $100,000 share to $71,000. Finally, once the shares are sent out, their own future value-added parts will be deducted from the estate, and the maximum gift tax exemption of $14,000 per person can be deducted. In other words, even if the property is worth 20 million US dollars, as long as people can live for 10 years, the total taxable value of the estate will be greatly reduced-still saving millions of dollars.

Some experts recommend the limited liability company this way, because after a certain period of time, this method can achieve a large amount of wealth transfer without incurring costs to parents. However, there is an important problem with the use of limited liability companies, which is to determine how much discount each share can receive. In the past, some people received a discount of up to 40%, which meant that the transferable value of shares worth US $100,000 was only taxable at a minimum of US $60,000, but this was more “radical.” It should be reminded that applying for a discount too much may cause the IRS to question it. If the IRS questions success, investors would not only save the money, but also pay extra interest and penalties. In view of this, it is recommended to choose QPRT instead of a limited liability company. In addition, the discount for QPRT is based on the data form published by the IRS, so it will not be questioned. The establishment of trust funds is also said to be very straight-forward.

Of course, most wealthy people will think of seeking reliable legal advice on these issues. It may be beneficial to remember this point in the process: Some people say that real estate inheritance tax is one of the most undesirable taxes, because its taxation is neither hard-working workers nor entrepreneurs, but Lucky person inheriting property. And, although you still have to pay taxes in the end, fortunately, there are some holes in the US tax law that can be used by well-informed people.