Estate Planning In Current Economic Environment / Future Tax Legislation

George P. Levendis
Levendis Law Group, PLLC

Patrick M. Schoshinski
Levendis Law Group, PLLC
 
 
I. ESTATE PLANNING IN THE CURRENT ECONOMIC ENVIRONMENT
 
A. Fundamental Variables That Are In Significant Flux in the Current Economic Environment
 
• Interest Rates

• In General

• Annuity Discount Rate

• 3.6% (Nov.)

 

• Short Term Rate

• 1.63% (Nov.)

• Mid Term Rate
  

• 2.97% (Nov.)
  

•  Financial Markets

• Local and World Economies

B. Assets Potentially Useful for Planning in the Current Economic Environment
 
• Types
 

o Low Basis Properties
o Family Business Ownership Interests 
o Depressed Valuations

• Objective
 

o Integration of Depressed Value Assets with Techniques that Benefit from Low Rates

 
C. Estate Planning Techniques that should be Considered in the Current Economic Environment
 
• Gifts

o Annual Exclusion 

• $12,000 increasing to $13,000 on 1.1.09
  

• Split Gifts 

• Possible use in conjunction with applicable Exclusion amount ($1,000,000 per taxpayer for gifts)
  

 

o Applicable Exclusion Amount

• $2M increasing to $3.5M on 1.1.09 for estates (reduced by lifetime use)
  

 
• Intra-Family Loans

o AFR Loans

• Loans to family members or trusts at the AFR (Applicable Federal Rate) may still be made in November at 1.63% (for loans of three years or less) and at 2.97% (for loans of four to nine years).
  

 

• If the loaned funds are invested and realize a return greater than the applicable AFR, the difference will innur transfer-tax- free to the borrower.
  

 

o Loans to Trusts

• The Trust must have the capacity to repay the loan.   

• If a loan is made by the grantor to a grantor trust, payment of interest to the grantor will not be a taxable event.
  

 
• GRATs (GRUTs)

o A GRAT (Grantor Retained Annuity Trust) is particularly attractive in today's market environment.  If, during the GRAT term, the investments in the GRAT realize a return greater than the applicable discount rate (3.6% for November), the excess, after payment to the grantor of the required annuity, will inur to the trust beneficiary or beneficiaries.  Where the GRAT asset values are low initially, and where they then advance in value at a significant rate during the trust term, the opportunity available because of current market conditions will be optimized.  

 

o The "zeroed out" approach for gift tax purposes is recommended.

 

o A GRAT will not realize its desired results if the grantor dies before the GRAT term expires or if the GRAT assets underperform the applicable federal discount rate.  

 

o The income of a GRAT is taxable to the grantor and transfers between the grantor and the GRAT are not subject to income taxation.

 
• CLATs (CLUTs)

o Similar Analysis to that of a GRAT:  Use of depressed value assets in the current low interest rate environment can result in a reduced annuity / unitrust interest for charity and / or larger remainder interest for heirs.

 
• IRA Dispositions

o Under recent legislation, a taxpayer who is 70 ½ years of age or over may distribute up to $100,000 in each of 2008 and 2009 to his or her favorite charity.  No income tax will be due on such a gift and the gift will qualify for mandatory distribution treatment.

 
• Charitable Gift Annuities

o Gift Annuities are attractive in the current environment for donors who wish to continue to receive an income stream while benefiting a favorite charity.  The fixed return of traditionally high rates on Gift Annuities (currently rates range from about 6.0% to 11.5% for the typically aged donor group) look good in a market where values may not hold and where commercial interest rates are low.

 
• Sale Transactions

o Sales to Grantor Trusts

• A sale of depressed value assets (which are expected to appreciate in value significantly) by a grantor to a grantor trust is a particularly attractive technique currently. 
  

 

• The typical approach (which may involve an intervening family limited partnership or similar entity) involves the use of valuation discounts in connection with the grantor's sale of assets to the trust after it has been funded by the grantor (in an amount equivalent to at least 10 percent of the projected sales price), in exchange for a note, followed by interest payments from the trust and a balloon payment of principal upon termination of the note.  
  

 

• No gain or loss is reportable on the sale and interest payments are not treated as income.  Future appreciation in the asset values in excess of the AFR applicable to the note passes to the trust remainder beneficiaries free of estate or gift tax.
  

 

o Sales of Loss Assets

• Stepped-Down Basis

• In the current environment, many taxpayers own stock or other property with a current fair market value that is less than the taxpayer's adjusted basis in the property.  In such case, a sale of the asset now may avoid a possible "step-down" in basis that would occur at the taxpayer's death.  Absent such action, the result may be loss to the family of realization of built-in losses.
  

 

o Other Sales

 
• QPRTs
 

o Employ currently where value of realty is deeply depressed

 
II. WHAT'S BEING CONSIDERED AND WHAT'S LIKELY TO HAPPEN IN ESTATE AND GIFT TAX
 
A. Implications of Presidential and Congressional Elections
 
• Short Term

o No Distinction Between Democrats and Republicans

• Financial Crisis

• Economic Stimuli

• Housing / Mortgages

• Long Term

o Income Taxes

• Obama

• Highest Brackets

• 36% (Under 250K / 200K income)

 

• 39.6% [Top 1% of Earners ($1.6M / yr and higher)]

 

• 20% rate on capitalgains and dividends
  

 

• AMT Reform?

 

o Transfer Taxes

•  Obama

• Announced Intentions

• $3.5M Applicable Exclusion Amount
  

 

• Top Rate of 45%

 

• Purported to exempt all but 0.3% of estates from taxation and to leave only about 100 small businesses potentially subject to transfer taxation
  

 

• Pronouncements

• Transfer Taxes should not revert to 2001

 

• Transfer Taxes should not be fully repealed (would be purported $522B cost over 10 years)
  

 

• Transfer taxes should be indexed for inflation
  

 

• Current Congressional Proposals

• Reunification of Transfer Tax Code?
  

 

• Including GSTT?

• Return to State Death Tax Credit Regime?

 

• Intra-Family Transactions

 

• Reformation (Abolition)?

 

• CLAT

 

• GRAT

 

• QPRT

 

• Limitation (Elimination) of Discounts?
  

•  Where intervening Entities are Employed
  

 

• In traditional ownership situations
  

 

• Are Discounts "Necessary" in a Depressed Market / Low Rate Environment?
  

 

• Can Codified Arrangements Eliminated by Future Legislation be Accomplished through Alternative Approaches?
  

 
•  2010 / Post January 1, 2011
 
B. Implications of Current Economic and Global Developments
 

• Unemployment
• Global Warming
• Iraq / Afghanista