As I walked into the office, I noticed that the market was already down 100 points today. It’s been doing that a lot lately. And then it goes back up a little. And then back down. While the market is busy doing gymnastics and we’re all concerned about our portfolios and retirement plans, the one thing that shouldn’t get lost in the haze of bad economic news is that now is a great time to do some estate planning.
Setting aside taxable gifts for the moment, let’s focus on a strategy that works best when assets have a built in potential to increase in value and interest rates are low: the grantor retained annuity trust, or a GRAT.
At its most basic level, a GRAT works like this: you give assets to the GRAT at no transfer tax cost and retain the right to receive annuity payments for a term of years. Any assets left in the GRAT at the end of your retained annuity term pass to the beneficiaries of the GRAT free of gift tax and are removed from your taxable estate. Your initial gift to the GRAT is not a taxable gift if the value of the annuity payments is equal to the value of the assets you transfer to the GRAT (called a “zeroed-out” GRAT). If you die during the retained annuity term or if you receive all the assets back in annuity payments, you’re in no worse of a situation than if you’d done nothing. The trick to a GRAT is that it needs to be funded with assets that are going to appreciate faster than the required annuity payments.
So why does a GRAT make so much sense right now? For starters, interest rates are incredibly low. Interest rates (specifically the Section 7520 rate announced by the IRS each month (see here)) are used to determine the amount of your retained annuity payment in a zeroed-out GRAT. For October, 2011 that rate is 1.40%. In order for a GRAT to succeed, the assets transferred to the GRAT must grow (through income or appreciation) at a higher rate than the Section 7520 rate. Now look at the stock market. The current economic climate has likely created some bargains in your portfolio that can be expected to appreciate over the next several years.
So if you’re looking at the stock market and thinking “based on the current prices, my portfolio is likely to grow by more than 1.4% over the next 2+ years” and you are interested in lowering your estate tax bill, then you ought to be considering a GRAT.
Should my relatives give money directly to my child with special needs?
No. Family members and friends should be cautioned against gifting money or property, or leaving money or property in their wills directly to your child except in ways that do not result in a loss of eligibility for public benefits or liability for the cost of your child’s care. If you desire, a special needs trust can be established during your lifetime to accept such gifts. It would be prudent to have grandparents’ wills reviewed by an attorney familiar with special needs trusts to avoid bequests that will have unintended and unwanted consequences. Further, neither you nor your relatives should establish any Uniform Transfer to Minors Act (UTMA) accounts for your child, as these accounts may disqualify your child for Supplemental Security Income (SSI) and Medicaid.
The October 2011 7520 Interest Rate dropped to 1.4%.
The October 2011 Applicable Federal Rates can be found here.
With interest rates dropping, October may be a good month to consider refinancing existing promissory notes. Consider contacting your attorney if you have any existing notes with high(er) interest rates.
Congratulations to the following members of Bryan Cave’s Private Client group, who were named to the 2012 edition of The Best Lawyers in America:
In our Atlanta office:
In our St. Louis office:
In our Washington, D.C. office:
For a complete list of the 116 Bryan Cave lawyers selected for the 2012 edition, click here.
The IRS today extended the deadlines for filing Form 706 or Form 8939 for decedents who died in 2010.
A doctor must obtain informed consent from you before providing medical care or performing any type of medical treatment. If you are unable to communicate your wishes, state laws determine with whom the doctor should consult regarding these decisions and the decisions would be made with the medical preferences of the family member(s) and the doctor. However, you can direct who should make these decisions and establish your preference with an advance directive for healthcare.
An advance directive is a document authorized by state law that combines a living will with a healthcare power of attorney. This document is typically referred to as an advance directive because it allows you to provide your directions in advance of your incapacity, but the exact name of the document will vary from state to state. Most people have heard of a living will, which allows you to state end-of-life treatment preferences when you are unable to express your wishes. A healthcare power of attorney is a lesser known document often prepared at the same time as a living will, which allows you to name a trusted person to make medical treatment decisions when you are incapacitated, and not able to communicate with your healthcare providers. (more…)
On September 3, the IRS released a final 2010 Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, for the estates of decedents who died in 2010. The Form can be found here.
On August 29, 2011, the 8th U.S. Circuit Court of Appeals in St. Louis held that an eight-year-old Iowa girl born two years after her father died is not eligible to receive his Social Security benefits. If your grandmother, like mine, would have thought it was fishy that a child was born less than nine months after a wedding, imagine her reaction to learning that a child was born two years after the father’s death!
But with the use of assisted reproductive technology, like in vitro fertilization and artificial insemination, it IS now possible for a baby to be born more than 9 months after a parent dies. The use of assisted reproductive technology means that, if a parent preserves his or her genetic material (his sperm, her eggs, or their embryo), a mother, or a surrogate mother, could become pregnant with a deceased parent’s child days, months, or even years after a parent’s death. These children are considered “posthumously conceived”. (more…)
The current low interest rate environment provides excellent opportunities to transfer wealth to family members. One approach commonly used to accomplish this goal is to sell assets to an intentionally defective irrevocable trust (“IDIT”). An IDIT is an irrevocable trust for the benefit of someone other than the creator of the trust (the “Settlor”), perhaps Settlor’s descendants. However, the “intentionally defective” component of the IDIT means that, for income tax purposes, the assets in the trust will continue to be treated as owned by Settlor. Thus, Settlor’s sale of assets to the IDIT will not result in income tax consequences. Additionally, Settlor’s payment of income taxes on the income earned by the IDIT provides an additional means of reducing Settlor’s taxable estate, while allowing the benefits of the income earned by the IDIT to benefit Settlor’s descendants.
Typically, Settlor will take back a promissory note for the assets sold to the IDIT. To the extent that the value of the assets held in the IDIT appreciates at a rate in excess of the interest rate on the promissory note, such excess appreciation is effectively a tax-free transfer of wealth by Settlor to his descendants. (more…)