 |  |  |  |  |
 |
 |
 |
 |
 |
|
|
|
|
|
|
B
F
A
R
LOW INTEREST RATES.
We are now experiencing the lowest Section 7520 rate (5.6%) since November and December of 1998 when
the applicable federal rate (AFR) was 5.4%. What does this have to do with estate planning?
A low AFR means that certain types of trusts and estate planning techniques are better values than when the
AFR (interest rates) are higher. What techniques are better values now? That is the subject of our Newsletter
this month, along with other commentaries.
CHARITABLE GIVING.
The Northern Michigan Council on Planned Giving had a technical session on October 11th. It was a video
conference on charitable giving sponsored by the Crescendo Software Company and hosted by Merrill Lynch.
The theme of the program was using charitable giving to zero out estate taxes for estates up to $5 million.
The same principles apply to larger estates, of course.
Charitable Remainder Trusts, Wealth Replacement Trusts, Charitable Lead Trusts, Lifetime Gifts and
Testamentary Trusts were all discussed in detail with concrete examples and calculations. The program was
technical - aimed at estate planning professionals, especially CPA’s and Financial Consultants.
Unfortunately, the attendance at the October 11th presentation was sparse and professional advisers were
not well represented. We have purchased the video and plan to do one or two more presentations, for which
two hours of Continuing Education credit will be available. Don’t miss the opportunity to expand your
professional knowledge when the next presentations are offered.
Doing a little professional advertising for Northwestern Michigan College, I am enclosing a flyer on courses
aimed at non-profits. My course on Fundamentals of Charitable Giving touches on the tax aspects of all kinds
of direct and planned giving. Recommend it to your non-profit clients. We need to spread the word.
CHARITABLE GIFTS NOW.
Back to our main subject, which is low AFR and charitable gifts for estate planning. The bottom line for
individuals with more than $1 million in net worth, or married couples with more than $2 million, is that
people of wealth can either pay the federal government or they can pay charity. The charity can be a family
foundation, a church, or the favorite charities of the family. A family fund can be established at the Community
Foundation so that family members can continue to participate in philanthropy without the entanglements and
expenses of a private foundation. A low AFR benefits some techniques and penalizes others. Charitable Lead
Trusts are a good bet for lifetime gifts now to transfer property to succeeding generations at the lowest
valuations. This is a way to maximize the annual gift tax exemption which rises to $1 million on January 1,
2002. A low AFR means that a smaller amount of the lifetime gift tax exemption would be used up, or the
family share could possibly be higher.
ESTATE TAX PLANNING.
We have a new set of ground rules under the 2001 tax bill. These rules will probably be in effect for the next
few years so we need to look to them for our planning, without counting on total repeal in 2010. Repeal is
looking more and more like a pipe dream.
The new paradigm is the divergence between gift tax and estate tax. This is the first time we have dealt with
these differences since attempts were made to unify gift and estate taxes years ago.
Now the gift tax exemption will be frozen at $1 million starting January 1, 2002, while the estate tax exemption
rises. Obviously, Congress wanted to discourage lifetime gifting for taxpayers who expect death in the next
one to seven years.
Planning thus becomes more of a challenge. We have a bigger gift tax exemption - $1 million - which is
capped. Clients do not want to pay gift taxes even though professional advisors run all sorts of numerical
comparisons pointing out advantages in doing so. The good news is that estate tax rates are down and
exemptions are up. The bad news is that the gift tax exemption is capped. The challenge for estate planners
is to figure out how to leverage the gift tax exemption.
LEVERAGING THE GIFT TAX EXEMPTION.
Clients who are adverse to paying more to the federal government than they need to should be informed
about the advantages of Charitable Lead Trusts in this era of low interest rates. This is an ideal way to
leverage the gift tax exemption and pass property to succeeding generations. A low AFR can locked in now by
a lifetime gift. The charity can be family controlled, which enables the senior generation to involve their
descendants in philanthropy and transmit some of their sense of community values.
Of course, Charitable Lead Trusts can be established by Will (just like Charitable Remainder Trusts which
are disadvantaged by a low AFR). Of course, not knowing when death will occur, we can only speculate as to
the AFR that may be applicable at the time.
OTHER TECHNIQUES.
QPRT’s are disadvantaged by a low AFR. Other techniques might have more appeal, especially since
residential properties have not declined in value as much as financial assets.
This might be a good time to think about a zero Grantor Retained Annuity Trust - GRAT. If you are an optimist
about the chances of increasing market value over the next few years, a short term GRAT might make a lot of
sense in a low AFR environment. The tax court in Walton has given the green light to the device, invalidating
IRS regulations to the contrary. Following Walton, a GRAT can be established with a zero gift. If the rate of
return of the trust principal exceeds the AFR rate, the difference will pass tax free.
©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. |
| October 2001 INTEREST RATES, CHARITABLE GIVING AND ESTATE TAXES 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 |