There aren”™t many positive things to say about the economy, however, for affluent families that still wish to transfer wealth to the next generation, this offers a relatively rare opportunity to do so at significantly reduced costs.
First, the value of many assets ”“ stocks, real estate, art, closely held businesses ”“ has been temporarily reduced. If we take the long view, it”™s possible the value will appreciate, perhaps significantly, as the economy recovers. Transferring such assets now, at their values, minimizes the tax consequences.
Second, the interest rates used in connection with estate and gift tax planning are at historic lows, enhancing the effectiveness of many wealth-transfer strategies.
In 2009, each person at their death can protect up to $3.5 million of assets from federal estate tax; a married couple with the proper planning can protect up to $7 million. In addition, each person has a $1 million lifetime gift tax exemption, but these lifetime gifts are tracked and reduce the $3.5 million available at death. Gifts to individuals of $13,000 per year or less, called annual exclusion gifts, are “free” gifts, that is, they don”™t reduce the $3.5 million available at death.
Each month, the U.S. Treasury sets minimum interest rates that must be used for certain transactions, including many wealth-transfer transactions, called applicable federal rates (AFRs). The April 2009 AFRs are as follows: for loans of up to three years, the AFR is 0.83 percent; for loans of between three and nine years, it is 2.15 percent; for loans of nine years or longer, it is 3.67 percent.
Here are some wealth-transfer ideas that take advantage of the current opportunities:
Annual exclusion gifts of depressed assets. In 2009, a husband and wife, with two children and four grandchildren, can make an annual exclusion gift to them of up to $156,000 without using up any of their $3.5 million. While a cash gift is a good idea, as it moves that $156,000 out of the parents”™ taxable estate, a better idea may be to gift an asset that is valued low now ”“ stocks or an interest in a rental property or family business ”“ but which may be worth a lot more later, thus moving even more value out of the parents”™ taxable estate.
Gifts of depressed assets using the $1 million lifetime gift tax exemption. A husband and wife together can gift up to $2 million to their children and grandchildren, or to a trust for their benefit. Again, rather than gifting cash, the parents could gift assets that have a low value now, but which are expected to bounce back. If the parents are worried about losing access to the gifted money, then another alternative is for one spouse to make a $1 million gift to a spousal lifetime access trust (SLAT) for the benefit of the other spouse.
Make intra-family loans at the low AFRs. Parents can make loans, including mortgage loans, to their adult children at the low AFRs. If the children are able to invest that money at a return that”™s higher than the AFR, the return in excess of the AFR will be moved out of the parents”™ taxable estate at no gift tax cost.
Gifts and sales to trusts
There are several estate planning strategies that take advantage of trusts to move wealth out of the parents”™ taxable estate and over to the children, and these strategies can be even more effective in the current environment.
Grantor retained annuity trust (GRAT). A GRAT is a special kind of trust in which, typically, a parent transfers an asset to the GRAT and in return the trust pays him or her a set amount each year for a set amount of years. The amount the GRAT is required to pay back to the parent each year is based on the “7520 Rate” (another rate set by the U.S. Treasury each month, 2.6 percent in April 2009). Thus, if the asset transferred to the GRAT grows at a higher rate of return than 2.6 percent, that excess return can be moved out of the parent”™s estate at little or no gift tax cost.
Intentionally defective grantor trust (IDGT). This is another very powerful technique in which the grantor, typically a parent, creates an IDGT, makes a “seed money” gift to it and then sells an asset to it, such as an interest in a family business. The IDGT pays for the asset with a promissory note back to the parent at the appropriate AFR. Again, if the asset sold to the IDGT grows at a higher rate of return than the AFR, that excess return is moved out of the parent”™s taxable estate.
Gregory J. Thompson is a director of advisory services with Siller & Cohen in Rye Brook, N.Y. Reach him at
gthompson@sillerandcohen.com.
