As Congress wrestles with expiring income tax cuts and the return of the estate tax, significant wealth transfer options remain for taxpayers with taxable estates. These techniques are designed to transfer assets to children at reduced or no gift and estate tax.
What is a taxable estate in 2011? Absent Congressional action, for a married couple it will be estates with values exceeding $2 million. For a single taxpayer, a taxable estate is an estate exceeding $1 million. If you add the equity in your real estate, retirement plans, other liquid assets and the death benefit of your life insurance, and you exceed these amounts, you have a taxable estate. For those with closely held businesses, there are greater estate values to consider.
So if you are worried about the return of the 55% estate tax, what are the wealth transfer options alluded to above? Well, there are several, but two of them are GRATS and Gift and Sale transfers to Intentionally Defective Trusts. I have written in the past on both techniques, so I won't explain again. See the Posts on December 15, 2008, April 13, 2009, May 18, 2009, February 22, 2010, May 3, 2010 and August 2, 2010 regarding GRATS, and see the attached article published in Virginia Business Magazine, regarding Gifts and Sales to Intentionally Defective Trusts.
Download Va bus art - gift_sale IDGT 6-30-09
The reasons why it is worth mentioning these techniques again are the same reasons that have made them appealing over the last few years. First, values are down, making it a good time to transfer assets before the economy improves or there is a sale event at a higher value. Second, assets can be transferred at even lower values because of market and minority discounts. Third, the IRS interest rates - the rate that determines the investment return taxpayers must receive in exchange for removing assets from their estates - are at historically low values. For a GRAT, the December interest rate is a meager 1.8%, and for the note payments on a sale to an Intentionally Defective Trust, the December interest rate on a nine year note is only 1.53%; on a three year note the rate is .32%.
These factors make it appealing to act now and before Congress and the Obama Administration outlaw these transfer techniques. Both techniques are in Congress' crosshairs. There was a legislative proposal in 2009 that would have eliminated market and minority discounts. The elimination of these discounts would have affected both GRATS and Gift/Sales to Intentionally Defective Trusts.
Regarding GRATS alone, within the last two years, there have been a couple of Congressional Bills that would have eliminated in large part the benefits of a GRAT. One Bill passed the House before it died in the Senate. The common themes to these Bills were to require a 10-year minimum term for GRATS and a minimum taxable gift. Now, GRATS can be designed for as little as two years (thereby allowing the appreciation to be transferred sooner) and without a gift consequence. Many expect two year GRATS to be eliminated by Congress in 2011.
By acting before the enactment of any legislation, you can still take advantage of short-term and zeroed-out GRATS and transfers of assets at discounted values to Intentionally Defective Trusts.
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