Autumn 2008 - Troubled Economy - Can You Still Do Estate Planning?
By Richard S. Fisher
In economic times like these, we are not sure how much money we will have next week or what our income will be, but there is some certainty in the estate planning field. President-elect Obama has said that his policy on federal estate taxes will be to continue the $3.5 million exemption that becomes effective on January 1, 2009. He also plans to maintain the 45% top federal estate tax rate.
With regard to the Connecticut estate tax (which is a combined estate and gift tax), there is little question that the $2 million exemption will not be increased given the projected large budget gaps for the next two fiscal years. For the first time, we will now have to deal with planning for a $2 million Connecticut exemption and a $3.5 million federal exemption, which requires a little dance step.
If it appears that your assets will exceed the $2 million exemption for an individual (or $4 million for a couple) a drop in values of both real estate and securities makes it an ideal time to shift wealth from one generation to another in a tax-efficient manner. Since the values of many assets are temporarily (we hope) depressed, utilizing annual exclusion gifts may make good estate planning sense.
In addition to outright gifts of $12,000 to individuals (increasing to $13,000 in 2009), gifts may be made by paying tuition on behalf of children or grandchildren. There is no limit on gifts in the form of tuition as long as they are paid directly to the institution.
If you have a business and wish to involve younger generations, this is an ideal time to transfer stock or other ownership interest, if the values have dropped. Another method to transfer an interest might be to sell the interest to what is called an "intentionally defective grantor trust." Because of the low interest rates now being set by the Internal Revenue Service, you can loan money to such a trust at rates perhaps as low as 4 ½ % and remove these assets from your estate. This technique allows you to achieve a basis equal to the selling price.
Other trusts such as the Grantor Retained Annuity Trust also allow you to make transfers at a low gift tax value. Because the IRS uses tables based on the present low interest rates, the values of the gifts are much lower than they would be in a higher interest environment.
If you have charitable inclinations, you might consider a Charitable Lead Annuity Trust, under which you contribute assets to a trust which then must pay income to charity during your life or during the life of you and your spouse. Again, these are attractive vehicles when rates are low because the amount of income to be paid to the charity will be based on a low rate. Any additional income earned above that rate will be added to principal and ultimately distributed to the children upon the death of the parent or parents.
Please contact our Estate Department for further details.
