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August 2009
Now is the Time for Tax-Efficient Wealth Transfers
By Danica Little

     It probably seems counter-intuitive during recessionary times to consider transferring wealth and business interests. But, depressed asset values and business valuations, and historically low interest rates offer unique wealth transfer planning opportunities to leverage assets and minimize gift, estate and income taxes.

     Wealth transfer planning often revolves around asset transfers that minimize gift and estate taxes. Taxable gifts in excess of the $1,000,000 federal gift exemption and the $13,000 annual exclusion trigger federal gift tax liability. Taxable estates in excess of the $3,500,000 applicable federal estate exclusion in 2009 ($1,000,000 in 2011) may trigger significant federal estate tax liability. Top marginal federal rates for gift and estate taxes are 45 percent for 2009 and 55 percent for 2011.

     Certain wealth transfer strategies minimize gift and estate taxes during economic times when asset values and interest rates are low. The right transfer techniques during recessionary times may allow (i) more assets to be transferred for each $1 of the transferor’s gift exemption and (ii) greater estate tax savings because more appreciation is outside of the transferor’s estate. Let’s take a look at a few techniques:

     Grantor Retained Annuity Trusts (GRATs) are irrevocable trusts where the transferor (i) gifts income-producing assets (such as non-voting stock of a closely held business) to a trust, (ii) retains income in the form of annuity payments, and (iii) shifts transferred assets, including income and appreciation, to the trust beneficiaries (which may be the business owner’s children). GRATs are statutorily permitted by the IRS for gifting remainder interest to trust beneficiaries with minimal gift tax. The gift is calculated based on published federal rates known as the applicable federal rates (AFR) at the inception of the GRAT. An ideal time to establish a GRAT is when AFRs and asset values are low, because if the transferred assets appreciate at a rate greater than the AFR, the excess appreciation passes transfer tax-free to the GRAT beneficiaries. Low interest rates and depressed asset values make GRATs very attractive strategies for transferring wealth.

     For example, a 10-year $2,000,000 GRAT established in July 2009 versus July 2006 results in a $160,000 smaller taxable gift based on the current lower AFR. The taxable gift would be further reduced $115,000 if asset values at the inception of the GRAT were depressed by 30 percent. The low AFR and asset values result in smaller taxable gifts that (i) use $275,000 less gift exemption or (ii) save about $125,000 in federal gift tax liability.

     Intentionally Defective Grantor Trusts (IDGTs) are irrevocable trusts where the transferor (i) gifts and sells assets to a trust, (ii) receives installment payments from the trust, and (iii) shifts transferred assets, including income and appreciation, to the trust beneficiaries. IDGTs are also permitted by the IRS provided that the IDGT is properly funded (typically a 10 percent gift of cash is recommended) so that the IDGT can meet its installment payments. Similar to GRATs, if IDGT assets appreciate at a rate greater than the AFR at the inception of the IDGT, the excess appreciation passes transfer tax-free to the IDGT beneficiaries. Economic times with low AFRs and depressed asset values make IDGTs attractive wealth transfer strategies that may significantly reduce the transferor’s gift and estate taxes.

     Charitable Lead Annuity Trusts (CLATs) are irrevocable trusts similar to GRATs except that a charity, not the transferor, receives the annuity payments during the term of the trust. Like GRATs and IDGTs, upon termination of the CLAT, the trust assets transfer to the non-charitable CLAT beneficiaries and asset appreciation in excess of the AFR at the inception of the CLAT passes transfer tax-free to the non-charitable CLAT beneficiaries.

     Qualified Personal Residence Trusts (QPRTs) are irrevocable trusts where the transferor (i) gifts her personal residence to a trust, (ii) retains an interest in the personal residence for the specified trust term, and (iii) shifts ownership and appreciation of the personal residence to the QPRT beneficiaries at the end of the term, provided that the transferor survives the trust term. QPRTs leverage gift tax valuation discounts for the (i) transferor’s retained interest in the personal residence for the trust term and (ii) possibility that the transferor may not survive the trust term. With depressed real estate values and low AFRs, QPRTs can be tax-efficient strategies to minimize gift and estate taxes on real property.

     Although it may be counter-intuitive to transfer wealth during tough economic times, depressed asset values and business valuations, and historically low interest rates make the present an opportune time for wealth transfer planning, especially with regard to closely-held business stock. An experienced estate and tax attorney can advise you regarding specific wealth transfer strategies and estate planning opportunities that minimize gift, estate and income taxes.

     Danica L. Little, J.D., C.P.A., C.M.A., C.F.M., is an attorney with Wishart, Norris, Henninger & Pittman, P.A., a law firm with offices in Charlotte and Burlington serving institutions, professionals, businesses and business owners. Contact her at 704-363-0010 or visit www.wnhplaw.com.

Danica L. Little CPA, CMA, CFM is an attorney with Wishart, Norris, Henninger & Pittman, P.A.
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