End of the Year Estate Planning Opportunities

December 2, 2011

Published: New Hampshire Business Review

What good can come out of a suffering economy, historically low interest rates and depressed asset values? An economic environment that is ripe with estate planning opportunities. 

Take advantage of your annual exclusion. You use it or you lose it. Each year you can give $13,000 ($26,000/ couple) to anyone without incurring gift tax. The simple way to do this would be to give cash, but there are estate planning techniques that allow you to take advantage of this annual exclusion amount without handing over cash. If you give assets with depressed values you will also have the advantage of passing on any future appreciation tax free.

Plan on doing significant gifting in 2011 and 2012.  Do you have a significant net worth and want to pass on your wealth with minimum gift and estate tax consequences? If so, 2011 and 2012 are the years to act. If you have more than 5 million dollars in assets – start giving it away.  Everyone has a lifetime exemption from gift and estate taxes. In 2010 Congress increased this lifetime exemption amount to 5 million dollars for two years. The tax rate on gifts made in excess of this exemption is currently 35%. Without further congressional action, the lifetime exemption amount is set to drop to 1 million dollars in 2013 and the tax rate is scheduled to increase to 55%. This year and next are excellent times to take advantage of the increased lifetime exemption and the lower tax rate.

There are countless estate planning options that allow you to take advantage of your annual exclusion and lifetime exemption.  A few of which are illustrated below.

Irrevocable Life Insurance Trust: You can establish an Irrevocable Life Insurance Trust (“ILIT”), of which your children can be the beneficiaries.  The Trust purchases a life insurance policy.  You then give money to the ILIT annually to pay the insurance premiums (using your annual exclusion) without giving your children real access to the money (except for a limited withdrawal period).  This allows you to fund a large insurance policy to benefit your children and keeps the value of the policy out of your taxable estate at your death.  If you have a large life insurance policy already in place, you can also transfer it to the ILIT at its current value, using up a portion of your lifetime exclusion but removing future appreciation from your estate.

Business Succession Planning: Another option is business succession planning.  If you have a closely held family business you plan on passing down to your children at your death, you can start giving your children minority interests in that business now. You may even be able to discount the value of the interests being gifted, enabling you to remove more wealth from your estate with each gift.

Family Compound Trusts: If you own a vacation property, you might consider establishing a Family Compound Trust, whereby you either gift all the interests in the trust now to your children or each year you gift interests in that trust equal to the value of your annual exclusion to your children. In the currently depressed real estate market, the opportunity to gift real estate (or portions of real estate) at a reduced value allows you to transfer interests in your family property at a reduced rate.  When the real estate market later recovers, the appreciated value of those interests will pass gift tax free.

Qualified Personal Residences Trusts: A Qualified Personal Residence Trust (“QPRT”) is a technique where you transfer your residence into a Trust to your heirs while retaining the right to live in your residence for a term of years. Funding a QPRT is an excellent way to use part of your lifetime exemption.  The initial transfer of the real estate to the QPRT is a gift to the remainder beneficiaries that is valued based on the remainder interest in the property.  Given the depressed real estate market, the value of the gift may be significantly lower than if you died with the real estate in your estate.

Take advantage of low interest rates.  Although your savings account might not be thriving with the low interest rates, your estate plan can. Each month the Internal Revenue Service releases what is called the 7520 rate (named after the tax code section). The 7520 rate is used to value annuities, income interest and remainder interests for gift tax purposes. The historic high 7520 rate was in June of 1989, when it reached 11.9%. The November 2011 7520 rate is 1.4% – an unprecedented low. This low 7520 rate creates an excellent environment for Grantor Retained Annuity Trusts.

Grantor Retained Annuity Trusts: A Grantor Retained Annuity Trust (“GRAT”) is a Trust that benefits the Grantor for a term of years, at the end of which the assets left in the GRAT are transferred directly to the remainder beneficiaries. With a “zeroed out” GRAT any appreciation made in excess of that 7520 rate will pass to the beneficiaries free of gift tax. Since the 7520 rate is extremely low, it is likely that there will be excess interest that will pass transfer tax free to the remainder beneficiaries making GRATs an excellent wealth transfer tool.

Since it is the season of giving – consider giving away your wealth now – the economic environment has created perfect gifting opportunities for the holiday season.

Doria D. Aronson is an attorney in the Trusts and Estates Department of McLane, Graf, Raulerson & Middleton, Professional Association.  She can be reached at doria.aronson@mclane.com.  The McLane Law Firm is the largest law firm in the State of New Hampshire, with offices in Concord, Manchester, Portsmouth, as well as Woburn, Massachusetts.