A Brighter Way
A Brighter Way
If there is a silver lining in these dark economic clouds, it's this: thanks to the resulting lower values of real estate, securities and businesses, now is a great time to transfer wealth. This is a very rare opportunity and you need to act quickly. Values will increase again, and when they do, a lot of these opportunities will disappear.
Here are just a few of the techniques that you may want to consider taking advantage of in the current economy.
A grantor retained annuity trust (GRAT) transfers property that is expected to increase in value, with little or no gift or estate tax. Since property values have dropped, future increases are almost given.
With a GRAT, you would retain the annuity for a fixed number of years. The gift value is calculated by taking the value of your transferred property, minus the value of the retained annuity (based on the monthly IRS interest rate). So basically, if the property's value increases above the interest rate and you survive the term of the GRAT, the value passes to your beneficiaries free of gift or estate tax.
You can currently set GRAT terms as short as two years and still set significant annuity interest rates to reduce the gift tax value. If the remaining interest has a gift tax value at all, it will be slight. But the U.S. Treasury Department wants GRATs to have a minimum 10 year term.
Under this scenario, a GRAT could still reduce or eliminate gift tax value on the remainder, but the chance that a grantor could die during the term increases. If you're considering a GRAT, you should act before the new minimum term takes effect.
Thinking about gifting interest in an operating company or passive assets? Do it soon. Congress might disallow minority discounts on gifted interest to family members in operating companies under common family control. These changes could increase the taxable value of gifts by 40 to 80 percent, and will affect most closely held companies, C corporations, LLCs and real estate LLCs.
In a time of low applicable federal rates (AFR), loans between family members can be a great way to shift wealth - you can charge an interest rate lower than a bank can without complicating your taxes.
Today's low interest rates also help GRATs, intentional defective irrevocable trusts (IDITs) and charitable lead trusts (CLTs). With an IDIT, you are essentially selling the business interest, but any income the trust generates will be included on your personal income tax return.
Most of the increase in value goes to your beneficiaries. Today's low interest rates can help you can make tax-free transfers. Similarly, with a CLT, you transfer cash, securities or property into a trust that makes fixed payments to a charity for a specified term, then the remaining principle transfers to your heirs. You have little or no gift tax as a result.
The estate tax credit currently limits the amount of money you can give away during your lifetime or at your death to $600,000. There is a good chance that the estate tax credit exclusion amount may increase. Depending on your situation, you may want to wait for the revised limit before making some direct gifts.
Change is inevitable. All of these proposed changes could impact your estate planning decisions, so be sure to discuss your unique financial situation and the impact of these changes with your advisor.
Together you can adjust your plan for the impending changes, and be better prepared to face the future.
This article was originally published in The Rea Report, Summer 2009 issue.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
