Estate Planning In View Of Possible Tax Law Changes

November 3, 2011 by Mitchell A. Port

You may want to consider making use of your gift tax exemptions in the next few weeks. Why? The “Super Committee” is scheduled to announce its proposals on November 23rd which might remove current benefits. The proposals may include changes in the current death tax regime, that is, the estate, gift and generation-skipping transfer tax laws. For example, by as soon as December 31st, the Federal gift tax exemption could be reduced from the current $5 million to $1 million or, though unlikely, as early as the November 23 announcement date. Other estate planning techniques may also be of interest, some of which may be affected by changing tax laws. These techniques are summarized elsewhere in this blog as well as below.

Use of $5 million Federal gift tax exemption. The current Federal gift tax exemption of $5 million (or $10 million for married couples who elect to split gifts) is scheduled to revert to $1 million (or $2 million for married couples who elect to split gifts) on January 1, 2013. A proposal was submitted to the Super Committee to revert to a $1 million Federal gift tax exemption one year earlier, on January 1, 2012, or possibly as early as November 23rd – just 3 weeks away. Consequently, you may wish to consider making immediate gifts to use part or all of the $5 million (or $10 million) Federal gift tax exemption.

Qualified personal residence trusts (“QPRTs”). In a depressed real estate market, a gift to a QPRT may result in shifting appreciation to your trust beneficiaries. Although this benefit is somewhat offset by the current low interest rates (which reduce the discount associated with the donor’s retained interest and result in a corresponding increase in the value of the gift), if you own depressed residential real estate you may still wish to consider establishing a QPRT.

Valuation discounts. There have been a number of proposals considered by the Super Committee that would reduce the availability of discounts associated with gifts of interests in some limited partnerships or other entities. You might therefore want to establish and transfer interests in such entities to take advantage of potential valuation discounts.

Low-interest loans. The lowest rates for intra-family loans for November 2011 are .19% (for loans up to 3 years), 1.20% (for loans greater than 3 years and up to 9 years) and 2.67% (for loans greater than 9 years). With low interest rates like these, you might make low-interest loans to family members or to trusts for their benefit or refinancing any loans that are currently outstanding.

Charitable lead annuity trusts (“CLATs”). For those of you who have been making substantial annual gifts to charity, consider creating a CLAT to fund those gifts since, like a GRAT, a CLAT is particularly effective in transferring wealth to family members in a low-interest-rate environment. Another benefit of acting now is that a current CLAT may take advantage of charitable deductions that Congress may limit in the future.

Grantor retained annuity trusts (“GRATs”). The Super Committee is considering a proposal to require that GRATs have a 10 year minimum term. Often, there are certain benefits associated with GRATs lasting less than 10 years. For those of you who would like to establish shorter-term GRATs, you should do that soon. In addition, a GRAT created now, regardless of the length of the term, would take advantage of the historically low “benchmark” rate (i.e., the minimal investment return necessary to pass wealth to the trust beneficiaries) of 1.4% for November 2011.

If you would like to discuss any of these tax techniques, contact Mitchell A. Port, an estate planning attorney, at (310) 559-5259.