With the sluggish economy, everyone could benefit from some good news. For those considering estate planning, we have good news, and more good news!
First, the estate and gift tax exemption amounts are at an all time high as a result of the legislation passed in December 2010. Each individual can now pass $5 million of assets estate and gift tax free. However, the $5 million estate and gift tax exemptions are effective only for 2011 and 2012. Absent additional Congressional action, the exemptions will return to $1 million in 2013.
What this means is that now is a great time to make a gift and use some or all of your gift tax exemption while the opportunity lasts. The benefit of your gift may actually be increased as a result of the down economy because asset values are low, meaning that you can stretch your $5 million exemption farther. While larger gifts often involve complex structures and strategies, smaller gifts may be as simple as writing a check or cancelling a loan. Be aware, however, that some gift strategies will require you to obtain an appraisal of the gift, which will take time to obtain. Plan accordingly! These larger gifts can also be used in conjunction with gift tax free annual exclusion gifts ($13,000 per person per year) which are commonly made at the end of the year.
Second, most people are aware that interest rates have been very low. This means that estate planning techniques that benefit from a low interest rate are potentially more powerful than ever in allowing you to transfer wealth to the next generation or beyond. The October 7520 rate dropped 0.6% from September to reach an all time low of 1.4%. The rate was 3.0% just a few months ago in May and has been as high as 11.6%. In particular, Grantor-Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs) benefit from a low 7520 rate because any increase in the value of the trust assets in excess of the 7520 rate passes to your family members once the annuity payments under the GRAT or CLAT have ended.
For example, assume you create and fund a 5-year GRAT this month with $2 million of non-discounted assets projected to grow at 8% per year. For a $0.59 gift tax cost, the GRAT will transfer almost $500,000 to children or others in trust or outright. If the assets are discountable and/or the projected returns are greater, even more wealth can be transferred tax efficiently.
Other planning tools benefiting from the low interest rate environment include installment sales to intentionally defective trusts, private annuities, and intra-family loans. However, the low interest rates makes Charitable Remainder Annuity Trusts (CRTs) and Qualified Personal Residence Trusts (QPRTs) less attractive as a tax minimization tool although suppressed market values may change the equation.
The combination of a higher gift tax exemption, low asset values, and low interest rates create an ideal time for wealth transfer planning.