Dedon on Estate Planning

Taking Care of Basics: Revocable Trust FAQs

With the end of the year approaching, it is appropriate to revisit a basic but yet important and neglected concept central to estate planning: the need to fund your Revocable Trust to avoid probate and, in the case of a married couple, to balance out the estates for tax purposes. The March 31 Post, reprinted below, discussed this funding in more detail. In addition to the guidance provided in the March 31 Post, set forth are common questions clients ask regarding how to transfer assets into their Trusts.

GRATs and GRAT Rescue Planning

Prior posts have discussed the estate and gift tax advantages of Grantor Retained Annuity Trusts (GRAT) to transfer family assets to beneficiaries. Reprinted below are my January 28, 2008 and April 21, 2008 posts, which discuss GRATs in detail. The dismal economy presents a unique opportunity to leverage GRATs by funding them with low value marketable securities and real estate. Another advantage is the applicable IRS interest rate, which is only 3.4% for December.

In fact, several clients are now creating new GRATs ("GRAT 2") to hold assets that within the last year had been transferred into GRATs ("GRAT 1"). Because the current values in GRAT 1 are unlikely to exceed the hurdle rate, those assets are being purchased by the client from GRAT 1 and then transferred into GRAT 2. These GRAT "rescue plans" are a highly desirable strategy in the current environment.

2009 Annual Exclusion Gift

The IRS has provided an early Christmas present by announcing that the 2009 annual exclusion gift is $13,000. It increases from $12,000, which was the amount in 2008. The annual exclusion gift is the amount that you can give to any recipient of your choice during the calendar year without tax consequence. If the gift is a present interest and qualifies for the annual exclusion, it does not erode the exemption amount available upon death. As has been widely reported, the exemption amount in 2009 increases from $2 million to $3.5 million.

For example, in 2009, if husband and wife have two children, in 2009 they can give $26,000 to each child. Upon their deaths, if they have done the appropriate planning, they could still leave $7 million to their children without any federal estate tax. (State estate tax may differ.) There generally is no reporting regarding the annual exclusion. However, there are exceptions depending on the type of gift and who is making the gift.

Designing Trusts For Children

A critical issue parents wrestle with in designing Trusts for their children upon their deaths is how to balance providing the necessary resources for their children against providing "too much too soon" and thereby undermining each child’s motivation to lead a productive and meaningful life. My July 28th Post, reprinted below for your convenience, describes how "ascertainable standards" are the typical provisions utilized to achieve this balance. The ascertainable standards are "health, maintenance, support and education." These words are well understood in the Trust world and in the eyes of the IRS. They provide guidance to Trustees to accomplish the parents’ objective to protect the child with adequate resources but not sap the child’s incentive.

Some clients go beyond ascertainable standards by providing specific guidance that condition distributions on various targets, such as achieving a level of education or income, or marrying, or pursuing a particular profession. These "Incentive Trusts" strike some as trying to "rule from the grave," while for others they merely provide the necessary structure and guidance to help the child when they no longer are able.