Estate Planning Strategies

January 15th, 2009

Because values and security prices have dropped to all time lows combined with record low interest rates means it’s a good time to lock in the value of your estate for estate tax purposes. It could preserve future cash flow by reducing inheritance taxes on the transfer of estate assets to your beneficiaries.There are a number of strategies you can use to take advantage of depressed market values to remove future appreciation on assets in your taxable estate and pass that appreciation to beneficiaries with no gift tax. One of the best tools to accomplish this is utilization of Grantor Retained Annuity Trusts (GRAT). This strategy is accomplished by the donor placing property that is likely to appreciate over its current value into a trust combined with the grantor’s right to receive a fixed annuity with remaining trust assets passing to the grantor’s children or other beneficiaries. This can be an outright transfer or includable into a continuing trust.

The neat component of this strategy is that the grantor’s retained annuity is designed so that its present value determined by IRS rules is equal to the current value of the contributed assets. The effect of this action is that the present value of the remainder gift to beneficiaries is zero ($0).

The IRS assumes that assets contributed to a GRAT will appreciate at a fixed interest rate which is called the “7520 rate.” For GRATS funded in January 2009 the 7520 rate will be 2.4%. Accordingly, to the extent that appreciation of GRAT asset exceeds 2.4%, it will pass to the remainder beneficiaries with no transfer tax consequences. Therefore, the GRAT program effectively freezes the value of assets for estate tax purposes at current low prices and values.

There could be some drawbacks in that some portion of the annuity payments will have to be made in kind, thus requiring revaluation of the trust assets on an annual basis. Another drawback is that this strategy isn’t well suited for passing wealth to grandchildren and other more remote descendents.

There are other strategies we can utilize which will be discussed in future blog posts. The GRAT strategy is a no lose situation. All you need if for one GRAT trust to work and you’re ahead because if other GRAT trusts don’t work you still haven’t lost anything.

We’ll share other estate and gifting strategies in subsequent blog posts.