2008 Year End Estate Planning Ideas To Consider
Louis A. (Drew) LaGrande, Esq. is a contributing author to the Yesner & Boss, P.L. blog and the following is a recent article which he contributed. Drew is a partner at Akerman Senterfitt based in Tampa, FL and specializes in legal areas such as estate planning and taxation.
Annual Exclusion Gifting
The most common methodology for tax-free giving is the annual exclusion gift of up to $12,000 per year per beneficiary in 2008. As stated above, in 2009, the annual exclusion amount will be increased to $13,000 per beneficiary per year. A married couple could give $24,000 per beneficiary in 2008 and, on January 1, 2009, could give an additional $26,000 per beneficiary.
The annual exclusion gift may be made in cash or "in kind." In other words, you may be able to make gifts of appreciated property, including limited partnership interests or other interest in closely-held family businesses, to maximize your annual exclusion gifting. If properly structured, the value of the interest can be discounted for tax purposes, thus enabling you to give more value to your beneficiaries. In some instances, an appraisal may need to be obtained to determine the value and the proper discount for such gifts.
In addition, a gift tax return may need to be filed to reflect the gifts to your beneficiaries. In some cases, this will add additional costs to the gift, but the potential for appreciation and the reduction of your gross estate may outweigh the economic cost in making such gifts.
Low Interest Rate Environment
It is important to consider interest rates when establishing and reviewing estate plans and lending money to family members. The current rates used to value wealth transfers are close to, if not already at historical lows. The Federal Reserve as recently slashed rates yet again to an all time low of .25%, which will also effect rates as published by the IRS. Generally, the interest rate which are used to value transfers involving trusts are known as the 7520 Rate. The rate is linked to US Treasury notes with 3-year to 9-year terms and is calculated monthly by the IRS and the December 2008 7520 Rate is 3.4%.
Following are three examples of wealth transfer options available in these low interest rate conditions:
1. Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust, or GRAT, is an irrevocable trust to which the grantor transfers assets but retains the right to receive an annual payment of a fixed dollar amount for a specific term years. At the end of the GRAT term, the remaining trust assets pass to the designated beneficiaries who are family members. The term of a GRAT is generally short, between 2 to 6 years.
The IRS assumes that the GRAT will grow at a rate equal to the 7520 Rate. The lower the interest rate, the larger the potential gift to the remainder beneficiary. For a GRAT to be effective, the asset transfer to the GRAT must actually return or earn a rate greater than the 7520 Rate. The transfer of assets to a GRAT generally does not result in a gift to the remainder family member beneficiaries. If structured properly, the appreciated or remaining assets in the GRAT at the end of the GRAT term will pass gift tax-free to the remainder family member beneficiaries.
2. Charitable Lead Annuity Trust
A Charitable Lead Annuity Trust, or CLAT, is similar to the GRAT except that annuity payments are made to a charity. The annuity payments must be paid out periodically and at least annually for a specific number of years. At the end of the CLAT term, the remainder interest must be distributed to one or more non-charitable beneficiaries which are usually family members.
As with a GRAT, a CLAT works best in low interest rate environments because the trust investment performances must accede the 7520 Rate. The assets left in the CLAT at the end of the term will pass to family members tax-free. A CLAT is a good choice for people who want to combine their philanthropic pursuit with family wealth transfers.
3. Intra-Family Lending
Another technique that may work well in low interest rate environments is family lending. The IRS prescribes interest rates specifically for this purpose. As of December 2008, the long-term applicable federal rate for a loan over a 9-year period is 4.4%. This is considerably lower than the average 30-year mortgage rate of approximately 6% (as of November 2008). If the family member is able to achieve a higher rate of return than the interest rate obligation, the excess will, in effect, constitute a tax-free gift to the family member.
Following are three examples of wealth transfer options available in these low interest rate conditions:
1. Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust, or GRAT, is an irrevocable trust to which the grantor transfers assets but retains the right to receive an annual payment of a fixed dollar amount for a specific term years. At the end of the GRAT term, the remaining trust assets pass to the designated beneficiaries who are family members. The term of a GRAT is generally short, between 2 to 6 years.
The IRS assumes that the GRAT will grow at a rate equal to the 7520 Rate. The lower the interest rate, the larger the potential gift to the remainder beneficiary. For a GRAT to be effective, the asset transfer to the GRAT must actually return or earn a rate greater than the 7520 Rate. The transfer of assets to a GRAT generally does not result in a gift to the remainder family member beneficiaries. If structured properly, the appreciated or remaining assets in the GRAT at the end of the GRAT term will pass gift tax-free to the remainder family member beneficiaries.
2. Charitable Lead Annuity Trust
A Charitable Lead Annuity Trust, or CLAT, is similar to the GRAT except that annuity payments are made to a charity. The annuity payments must be paid out periodically and at least annually for a specific number of years. At the end of the CLAT term, the remainder interest must be distributed to one or more non-charitable beneficiaries which are usually family members.
As with a GRAT, a CLAT works best in low interest rate environments because the trust investment performances must accede the 7520 Rate. The assets left in the CLAT at the end of the term will pass to family members tax-free. A CLAT is a good choice for people who want to combine their philanthropic pursuit with family wealth transfers.
3. Intra-Family Lending
Another technique that may work well in low interest rate environments is family lending. The IRS prescribes interest rates specifically for this purpose. As of December 2008, the long-term applicable federal rate for a loan over a 9-year period is 4.4%. This is considerably lower than the average 30-year mortgage rate of approximately 6% (as of November 2008). If the family member is able to achieve a higher rate of return than the interest rate obligation, the excess will, in effect, constitute a tax-free gift to the family member.
Estate Planning Check-Up
In light of upcoming changes in tax law and for individuals who executed their estate planning documents more than 3 years ago, it may be advisable to review your estate planning documents. It may be beneficial to meet with your estate planning attorney for an estate planning "Checkup" and to take advantage of some of the planning tips as discussed above.