A valuable home can constitute the bulk of your estate. In certain regions, a rather modest-appearing home is easily worth $1 million or more.
You may feel this puts you into an estate-planning bind, because you are virtually forced to leave the home to your surviving spouse to avoid a big estate-tax hit. In turn, you may then feel forced to leave nothing but liquid assets to your children (either via a bypass trust or directly) or leave them nothing at all.
The problem: That saddles your spouse with an illiquid asset when she may need cash to pay living expenses. If you're in this boat, here's an idea:
Strategy: Amend your will so that the house goes directly to your kids.
As long as the property is worth $1.5 million or less, it won't cause any federal estate-tax bite, assuming you live until at least the start of 2004.
You can then leave most or all of your liquid assets—such as life insurance proceeds, retirement accounts, investments and cash—to your spouse. Under the unlimited marital deduction, that tactic is free of any federal estate tax, too. If your spouse wants to continue living in the house, she can arrange to rent it from your children.
Tax-saving bonus No. 1: Handing the house down to your children removes an appreciating asset from your estate and from your spouse's estate, too. That's a double-smart strategy.
Tax-saving bonus No. 2: The income-tax basis of your home is stepped up to equal its fair market value on the date of death. That will sharply reduce any federal capital gains tax when your kids sell the house.
If one of your children takes over the home as his or her personal residence, up to $500,000 post-death appreciation can be sheltered from federal capital gains tax under the "home sale gain exclusion" privilege.
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