GIFT AND ESTATE PLANNING AND THE HOUSE: GIFTS AND BYPASS TRUSTS

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.