Estate Planning Update

In December 2010, the tax law changes enacted that month increased the unified gift and estate tax exemption to $5 million. An individual can now transfer up to $5 million of assets without incurring gift tax. For a married couple, the couple can transfer up to $10 million. Making gifts allows an individual to remove any future appreciation in the assets from an estate. When combined with valuation discounts, an individual can accomplish significant savings. The $5 million exemption is on top of the $13,000 each individual may gift to any person per year free of gift tax or use of lifetime exemption.

The $5 million exemption is only in effect through 2012. Make gifts over the next few months. If the gift and estate tax exemption is set at less than $5 million after 2012, the IRS may try to “clawback” the gifts made in 2011 and 2012 at the death of the donor so the amount of any such gifts that exceed the estate tax exemption at the time of death would be subject to estate tax.

In most situations, there will be no down to making gifts using the increased exemption as compared to the upside of removing the appreciation in value of any assets from an estate. An experienced New York tax attorney could discuss, in the context of a New Yorker’s personal circumstances, what may be a chance to decrease estate and gifts taxes for a family.

Various bills have been introduced to require a grantor retained annuity trust (GRAT) to have a minimum annuity period of 10 years. A GRAT pays the donor an annuity for a particular period based on an interest rate tied to mid-term Treasury rates. In return, the asset appreciation in the GRAT above such rate passes to the beneficiaries at the end of the period with minimal use of gift tax exemption.

A GRAT works if the grantor survives the annuity period. If s/he does not survive, the value of the property is included in the grantor’s estate. A law that a GRAT have a minimum annuity period of at least 10 years would decrease the likelihood of a successful GRAT. It would reduce the ability to take advantage of short-term market upswings, or to recover from short term downs.

Today, a GRAT remains a technique to transfer wealth to later generations in the current environment of low interest rates. Act now to create a short-term GRAT to transfer business interests, real estate, or other assets to family.

Similar to the GRAT is a sale to a grantor trust. This removes from the taxable estate the appreciation in the value of the assets that surpass mid-term Treasury rates. Because of low interest rates, a sale to a grantor trust transfers wealth to the next generation with less tax

To take advantage of current tax laws, discuss estate planning with an experienced New York tax attorney.