CURRENT BUSINESS CLIMATE PRESENTS
HISTORIC OPPORTUNITIES FOR ESTATE PLANNING
The current economic and political climates, and proposed law changes, create some urgency to implement certain estate planning strategies. In some cases, there may be very tight deadlines to utilize very favorable tax planning strategies before they are ended or neutralized by Congress in coming months. Some current estate and estate tax planning opportunities available to certain individuals (generally individuals and/or families with a net worth of $3 million or more, inclusive of life insurance, death benefits, retirement plans, and future inheritances) are discussed below.
In his recently announced budget, President Obama revealed some of his vision for the future of the estate tax, sometimes called the “Death Tax.” At this point, it appears that the tax may resemble the following:
- For this year (2009) and subsequent years until changed, federal exemption amounts will likely continue to be $3.5 million per person (or $7 million per couple); and
- The value of estates above the exemption will be taxed at 45% - 50%.
Based on this knowledge, individuals can now take advantage of historically low asset prices and interest rates and the planning opportunities created thereby, before future inflation causes asset and estate values to artificially increase.
One technique to consider now is a Grantor Retained Annuity Trust (GRAT), which allows individuals to shift future asset appreciation to the next generation with little or no gift, estate, or income taxes. A GRAT allows an individual to transfer assets to a GRAT while retaining an interest in the trust. The interest from this income will be stated as an annuity percentage of the original assets transferred to the trust. The GRAT, which has a specific life or term, pays the grantor the required payment on an annual basis. At the end of the GRAT term, any remaining assets will be distributed to the named beneficiary(ies). Generally, it is advisable to set up a series of multiple GRATs to take optimum advantage of future value uncertainties.
HISTORICALLY LOW INTEREST RATES
The low interest rates that we are experiencing provide individuals with unique opportunities to share asset appreciation with their beneficiaries. Many estate and gift tax saving techniques are interest rate driven. Current interest rate levels present individuals with an opportunity to reduce future estate and gift taxes through the funding and use of:
- Grantor Trusts
- Charitable Lead Annuity Trusts; and
- Installment Sales to Grantor Trusts.
These methods, and other available techniques, will allow parents to take advantage of historically low asset values, and transfer future appreciation in value to the next generation with greatly reduced gift and estate taxes.
ASSET PROTECTION OPTIONS
In addition to the estate planning opportunities resulting from the current political environment and economic climates, individuals may wish to consider the benefits of including asset protection features in their estate planning. Recent changes in state laws mean that self-created spendthrift trusts are now legal in a number of states. Even traditional trusts are receiving more attention as opposed to large outright gifts or bequests. These trusts, which include carefully crafted asset protection clauses, can protect an estate against:
- Divorce claims;
- Malpractice;
- Creditors; and
- Legal judgments
Additionally, properly structured trusts will ensure that:
- Individuals can pass assets to future generations in simple trusts, which name the beneficiaries as sole trustees or co-trustees;
- Family assets are protected from a new spouse of a surviving husband or wife, should a widow or widower remarry; and
- Marital deductions are property planned and allocated.
Finally, parents with special needs children should consider the variety of “special needs trusts” that are currently available. These trusts are quite flexible and need particular drafting focus to ensure proper protection of assets from government claims and other creditors. Additionally, a carefully planned special needs trust will not disqualify a person with special needs from receiving government benefits, such as Supplemental Security Income (SSI) and Medicaid.
STRATEGIC PLANNING
Recent changes to gift tax laws mean that a well-created gifting plan can avoid a number of taxes. For example, the annual donee gift tax exclusion has been raised to $13,000 (or $26,000 per couple). Just a few years ago, the exclusion was set at $10,000 (or $20,000 per couple).
A properly focused gifting plan can provide parents and other family members of modest means an ability to pass along assets while saving on future gift and estate taxes.
Additionally, education trusts under Section 529 of the Internal Revenue Code (commonly called “529 Plans”) have gift, estate and income tax advantages over regular trusts for minors. These trusts can provide a method of ensuring the education costs of future generations in a tax efficient manner.
Finally, historically low interest rates provide novel methods for making gifts. For example, inter-family loans are currently subject to interest rates as little as 2.0% - 2.5%. Such rates represent an opportunity, if properly exploited, to make unprecedented tax-free gifts.
DON’T DELAY!
Now is the time to take advantage of these planning opportunities. Currently, there are proposed bills in Congress that will adversely affect estate planning, such as the proposal to eliminate minority discounts (the 20% - 60% minority interest and illiquidity discount factors). Under one proposed rule, intra-family transfers would no longer receive the benefit of a minority discount for valuation purposes, under certain conditions. As a result, the traditional advantages of family limited partnerships are in jeopardy.
Additionally, asset values – which are currently low compared to historical values and expectations – are expected to rise in the middle term. Take advantage of these short-term opportunities while they last!
Adams and Reese LLP is a full-service law firm with offices in Alabama, Louisiana, Mississippi, Tennessee, Texas and Washington, D.C. For more information about tax planning opportunities and estate planning options, please contact one of our Tax team contacts:
Mark Embree
(504) 585-0247
mark.embree@arlaw.com
Joe M. Goodman
(615) 259-1011
joe.goodman@arlaw.com
John F. Lyle
(251) 650-0857
john.lyle@arlaw.com
Joseph B. Walker
(901) 524-5276
joe.walker@arlaw.com |
