Estate Planning Techniques for Immediate Consideration in Light of Potential Tax Law Changes

November 1, 2011

The Joint Select Committee on Deficit Reduction (the “Super Committee”) is scheduled to announce its proposals on November 23. The proposals may include changes in the current estate, gift and generation-skipping transfer tax laws. In particular, there is concern that the Federal gift tax exemption could be reduced from the current $5 million to $1 million, possibly as soon as December 31 or, while less likely, as early as the November 23 announcement date. Thus, clients may wish to consider making use of their gift tax exemptions in the next few weeks. Several other estate planning techniques may also be of particular interest in the current environment, some of which may be affected by changing tax laws. These techniques are summarized below. For more information, see our memorandum entitled Overview of Estate, Gift and GST Planning dated January 19, 2011.

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. As noted above, there are also concerns that the reversion could be accelerated to as early as November 23rd of this year. Accordingly, clients may wish to consider making immediate gifts to use part or all of the $5 million (or $10 million) Federal gift tax exemption.

Grantor retained annuity trusts (“GRATs”). There have been a number of proposals, including one that is currently before the Super Committee, to require that GRATs have a minimum term of 10 years. As we discussed in prior memoranda, there are certain benefits associated with shorter-term GRATs. Clients who would like to establish shorter-term GRATs should do so promptly. 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.

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). In light of these low interest rates, clients may wish to consider making 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”). Clients who have been making substantial annual gifts to charity may be interested in 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. Moreover, a current CLAT may take advantage of charitable deductions that may become more limited in the future.

Discount entities. There have been a number of proposals, including one that is currently before the Super Committee, that would curtail the availability of discounts associated with gifts of interests in certain limited partnerships or other entities. Clients may thus wish to establish and transfer interests in such entities to take advantage of potential valuation discounts.

Qualified personal residence trusts (“QPRTs”). In a depressed real estate market, a gift to a QPRT may result in shifting significant appreciation to the trust beneficiaries. Although this benefit is offset, to a certain degree, 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), clients with depressed residential real estate may nonetheless wish to consider establishing QPRTs.

If you would like to discuss any of these techniques, please contact one of the attorneys in our Private Clients and Charitable Organizations Practice Group.