If you happen to die in 2010, your estate planning problems are over—at least they might be. For a year, at most, the federal estate tax is gone. But the tax is scheduled to return in 2011 in a much more punishing form than it took in 2009, and that prospect could motivate a congressional compromise, with new rules that may be applied retroactively to wealth transfers during 2010. That means there’s really no holiday for wealthy families looking for tax-efficient ways to move assets to the next generation. And though there is no federal estate tax in 2010, there is a limited step-up in basis which could trigger capital gains for beneficiaries of large estates assuming they sell the assets immediately. Still, with stocks, real estate, and almost every other kind of asset worth less now than before the recession, you may be able to transfer more to your heirs at lower cost, and today’s rock-bottom interest rates could also help. Consider these five strategies that attempt to take advantage of the current economic environment.
1. Get the most from the annual gift tax exclusion. This tried-and-true vehicle may be worth more now than ever before. In 2010, you can give up to $13,000 of assets to as many recipients as your choose—or a maximum of $26,000 for each gift if your spouse joins in—without gift-tax liability. But keep in mind you’ll have to file a gift tax return for joint gifts, even if the total gifts are $26,000 or less. The trick here is to give away something whose value has dropped but is likely to recover.  2. Take advantage of low interest rates to make a loan or asset sale to family members. Here, too, current economic circumstances can maximize the value of funds you transfer to the next generation. You could lend money to buy a home or start a business, charging interest based on today’s low applicable federal rate (AFR)—in June 2010 just 4.30% on loans with a term longer than nine years. Or you might sell assets—whose value may be at a low point—to family members directly, or to an irrevocable trust set up for their benefit, with installment payments also based on the AFR rate.
3. Create a grantor trust with undervalued assets. This can be yet another way to capitalize on the temporarily depressed value of many assets. You can use your annual gift tax exemption—perhaps supplemented by some or all of the $1 million lifetime exclusion that individuals may employ to shield gifts from taxes—to transfer assets into the trust. Then, you’ll be responsible for income and capital gains taxes on trust assets. Though those payments further reduce your taxable estate, they aren’t considered gifts to the trust’s beneficiaries, and they enable trust assets to continue to grow unencumbered by taxes, adding to the potential recovery of beaten-down assets. 4. Boost the benefits of a grantor retained annuity trust. A GRAT can preserve assets from the sale of a business interest or other holdings. Essentially, you transfer assets to an irrevocable trust, but retain the right to receive distributions over the trust term. The annuity is based on the amount transferred and the prevailing interest rate set by the government under Section 7520 of the tax code. (The 7520 rate as of June 2010 is 3.2%.) The lower the rate, the lower the payout, resulting in more asset preservation for your heirs—particularly if the assets rebound in value. It’s also possible to “zero out” a GRAT, effectively eliminating any gift tax on the transfer to the GRAT. (Keep in mind that Congress may modify the rules affecting these techniques.)  5. Use a charitable lead trust (CLT) to help charities and your heirs. With a CLT, income on trust assets during the term of the trust goes first to the designated charity and then to your heirs, who also ultimately inherit trust assets. Most nonprofits have suffered during the recession, and they’ll welcome this annual infusion of cash. And if the CLT earns more than the specified yearly payment—based on a fixed amount or percentage of assets—the excess is added to principal. If an economic recovery increases the value of trust assets, your beneficiaries could benefit.
One or more of these strategies could help you and your heirs benefit from an otherwise dismal economic environment. Yet uncertainty abounds. No one knows what will happen to the estate tax or to tax rates on gifts and income, and there’s no guarantee that the economy will improve, or that stock prices or real estate values will soon recover what they lost during the long downturn. We can work with you and your attorney to consider your wealth-transfer goals and to create a plan that makes sense for you in these troubled times. |