Are Estate Planning Opportunities About to Expire?

In our last alert, sent in January, we described the one-year “repeal” of the federal estate and generation-skipping transfer (GST) tax and the one-year “reduction” of the gift tax rate. We warned that “repeal” and “reduction” were in the law as written but that there was the possibility of retroactive reinstatement. We also described how, under the law as written, the estate and GST taxes come back with a vengeance, and gift tax rates increase, in 2011.

Congress has not yet acted to clear up any of the uncertainty surrounding these taxes. With Congress now recessed until after the November elections, any congressional action would take place, at the earliest, during the year-end lame duck session. Whether there will be any year-end legislation, or what it would say, is anyone’s guess!

In spite of the uncertainties of possible future legislation, 2010 presents us with great estate planning opportunities. Many of our clients have already made substantial transfers this year, and more plan to do so before year-end. If you wish to take advantage of 2010’s unique opportunities, please get together with your estate planning attorney soon so you can be sure the necessary work can be completed by the end of 2010.

2010 Gifts

The Potential Reward: 2010 gift tax rates are the most favorable rates that we have ever seen. This year’s 35% gift tax rate presents a materially lower cost than last year’s 45% rate or the 55% top rate that will apply in 2011 and future years unless Congress acts. In addition, if the donor survives three years after the gift, the gift tax paid is removed from the estate, lowering taxes even further.

The Risk: Although there is a risk that gift tax rates could be increased retroactively, this risk appears to be slight. There is also the risk that if a donor died during 2010 after making a large taxable gift, the gift tax would have been paid unnecessarily as the temporary repeal of the estate tax is still in effect. Similar risks apply to generation-skipping gifts and trust distributions described below.

2010 Generation-Skipping Gifts

The Potential Reward: Donors with adult grandchildren should seriously consider making outright gifts to those grandchildren in order to “skip” payment of estate and gift taxes in their children’s generation. Under the current law, these gifts would be subject to the gift tax but not to the GST Tax.

The Risk: Gifts to or for the benefit of minor grandchildren are possible, and may be accorded the same favorable tax treatment as gifts to adult grandchildren. However, there are practical and technical issues that need to be discussed with your estate planner. For example, would you want your 12-year-old grandchild to receive $1 million in cash, even if taxed at lower rates? Most of us would not!

Favorable Economic Factors

Historically low values for many types of assets, including residences, vacation homes, publicly traded stock, private companies, commercial real estate investments and alternative investments may present excellent gifting opportunities.

Low interest rates can also make this a favorable time for making loans or “leveraged” gifts such as those made through installment sales and Grantor Retained Annuity Trusts (GRATs). Short-term GRATs are extraordinarily tax-efficient vehicles for making transfers, and acting now could be important because they may be legislated out of existence before year-end.

2010 Trust Distributions

Trusts that are not exempt from GST tax, including trusts resulting from a successful GRAT or Qualified Personal Residence Trust (QPRT), may have a one-time opportunity to make distributions to grandchildren or further issue of the donor free of GST tax, again avoiding tax in one or more generations.

Deaths in 2010

Estates of decedents dying in 2010 present unique challenges and opportunities that we have now worked through with many families.

As described in our January update, estate plan reviews are important in this uncertain climate. Clients who are in poor health should be particularly careful to review their estate plans and allocation of their assets. Such clients, and particularly married couples, may be able to take advantage of unique planning opportunities to benefit their families.

Examples

Here are some examples of planning we have done for clients:

• A client who is in poor health has been making substantial, taxable gifts to his adult children annually. We recommended accelerating that gifting strategy substantially in order to take advantage of lower gift tax rates. Gifts will be made as close to year-end as possible in order to avoid paying gift tax unnecessarily in the event the client does not survive until year-end.
• A widow has set up a limited liability company (LLC) with assets she wants to transfer to her children and grandchildren. Asset values are low relative to their potential value and, in addition, valuation discounts can be claimed on interests in the LLC. We designed a gifting strategy that takes advantage of low gift tax rates and the lack of GST tax, while providing some ability to undo the gifts if the GST tax is re-imposed retroactively.
• We have recommended substantial distributions to grandchildren from a trust that would otherwise be subject to GST, or inclusion in the children’s estates, upon termination.
• We have helped numerous clients create short-term GRATs.

Next Steps

Some — perhaps all — of these opportunities expire at the end of the year. Guidance from your estate planning attorney, careful consideration of the options and careful planning are critical. Please contact your Bingham estate planning attorney as soon as possible if you want to get started!