Estate Planning In Troubled Times

by Delrose A. Koch

During the current economic turmoil it is vitally important to review your estate plan. Even in these times there is positive news to report that can be used to plan for you and your family:

Effective January 1, 2009, the individual exclusion from the federal estate tax increased for persons dying in 2009 to $3,500,000. (The $1,000,000 lifetime gift tax exclusion is unchanged.)

The gift tax annual exclusion increased from $12,000 to $13,000 per donee per year for outright gifts.

Dramatically declining asset values have created opportunities to gift assets at very low values. The volatility of publicly-traded securities also translates into opportunities to employ greater valuation discounts for privately-owned securities.

The IRS applicable rates used to establish minimum interest rates for loans, together with interest rates used to value annuity interests in grantor retained annuity trusts (GRATs) and other techniques based upon treasury rates, are at historically low levels.

The combination of depressed asset values and low interest rates makes this a truly unique time to use strategies like GRATs, sales to defective grantor trusts, and qualified personal residence trusts (QPRTs). Using these tools provides a great opportunity to transfer large amounts of wealth sheltered by the gift tax exclusion, or at no gift tax cost if you have exhausted your gift tax exclusion. GRATs and similar techniques that have “gone bust” due to the decline in the value of the assets in the GRAT can be salvaged by using newly-created GRATs or by substituting assets in the GRATs.

Time is of the essence regarding these strategies. Congress likely will act soon to amend the estate and gift tax laws, because the estate tax currently is set to expire for one year in 2010. A bill already has been introduced in Congress to eliminate use of the “Zeroed out GRAT” discounts for passive investment assets and the use of Crummey Powers. Other provisions might curtail use of multi-generation “dynasty trusts.” Now is the time to review your planning and consider gifting to lock in dramatically low values and rates.