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Is Estate Tax Going Out the Window? The election is over and now everyone can heave a sigh of relief and get
back to business. We won’t have to listen those inane, back-biting sound bites on television, and my home
answering machine will stop filling up with recorded messages.
Does this mean that planning for estate taxes is out the window on the assumption that President Bush will
proceed to ram through a permanent repeal of the estate tax? I am not a political seer, but I would not bet that
"tax reform" will mean getting rid of the estate tax. Our recommendations to wealthy clients, entrepreneurs
and business owners with a net worth of $5 million and up is to make sure that your estate planning
contemplates the possibility of an estate tax.
Low Interest Rates are Back. December’s AFR rate is 4.2%. Client’s should use the opportunity of low rates
to use riskless techniques to move wealth to children and grandchildren that don’t involve:
- Changing lifestyle
- Parting with cash and liquid securities
- Change in overall estate plan
Charitable Intentions. If a client has some charitable intent and wants to save taxes, a Charitable Lead Trust
(CLT) is an ideal way to benefit charities currently and pass property to later generations at little or no transfer
tax cost. Current low interest rates make a CLT especially attractive. If combined with a private foundation the
assets can remain in family control, taxes reduced or eliminated and charitable causes furthered .
A CLT provides for a current cash flow to charities (including a client’s private foundation) with a delayed
delivery of the trust principal to family members, usually after a specified term of years, at discounted values
so low that they can be well within a client’s gift tax exemption ($2.0 million for a married couple). If there is no
estate tax, wealth has still been moved to family members and charities have been benefitted. For example,
using November’s 4.2% AFR, an 8%, 20 year Charitable Lead Unitrust for grandchildren of $1.0 million uses
up less than $200,000 of the lifetime gift tax exemption. This could be dynasty trust which will never be subject
to any transfer tax. It is even exempt from the generation skipping tax.
If a client wishes to benefit children (and not skip a generation) an 8% charitable payout for twenty years from
a Charitable Lead Annuity Trust (CLAT) would mean that the gift value for children is zero. Reducing the
payout to charity, of course, raises the calculated value of the remainder and increases the amount of money
that would be remaining at the end of the term. For a $1.0 million CLAT and an 8% payment to charity for ten
years, the children’s value is calculated at only $357,000, a small fraction of the couple’s $2.0 million gift tax
exemption.
Thus, a private foundation, under family control, or a public charity, can be benefitted substantially while at the
same time providing for tax-advantaged transfers of wealth to later generations.
Lead Trusts in a Client’s Revocable Trust. Older clients with high net worths - $15.0 million and up - should
all have formula Charitable Lead Trusts taking effect at death, to make huge reductions in a potential taxable
estate. These trusts can be designed by formula to reflect tax rates and AFR’s in effect when the taxable death
occurs. If there is no federal estate tax, then nothing is lost but the lawyer’s time. In the meantime, a client has
the peace of mind knowing that if there is a federal estate tax on their estate, there will be a substantial
reduction in the taxes paid by the family (in many cases, the potential tax based on today’s rates can be
completely eliminated). If these formulas take effect at death, the client has not parted with any assets
currently.
GRATs. Your entrepreneur and business owner clients should all be looking at doing Walton-GRAT’s. That is,
transferring interests in their family companies, whose values are growing more than 4.2% per year to a
Grantor Retained Annuity Trust (GRAT). A GRAT should be a no-brainer in today’s interest environment.
The IRS has blessed the zeroed GRAT, after the Walton case (the subject of previous letters). A ten year
GRAT at November’s rate, with a company growing at ten percent per year means the remainder, to be left in
trust for children, for example, would be 61% of the beginning principal, transfer tax free. If the gift and estate
taxes are repealed, nothing has been lost except the expense to setting up and administering the GRAT.
Interests in the business are transferred to the next generation which is what the business owner normally
wants anyway.
You should not let your clients let this opportunity go by. Rates may even get a little lower, but we all know that
the AFR is not going to stay down at these levels forever with high federal deficits and the US Dollar at new
lows. The Fed will have to keep raising rates even if not in a uniform progression.
GRAT’s are sometimes hard for clients to understand. They don’t have to part with cash. The annuity
payments can be made in shares of the Corporation or LLC. A client can even do a GRAT with stair step
payments if they think company growth rates will be higher in the future.
GRAT’s can help clients achieve non-tax estate planning objectives: transferring wealth without affecting
control or liquidity; asset protection; and business succession to name a few. Low interest rates make GRAT’
s especially attractive now! Don’t let your clients miss this train.
If you have clients who should be interested Lead Trusts now, changing their Revocable Trusts to make sure
transfer taxes (if any) are reduced, or if you have clients with family held businesses and a potential of large
estate taxes, for whom a GRAT makes eminent sense, please contact Jim Modrall at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| November/December 2004 LOW RATES ARE HERE AGAIN by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |