November 2008
Practice Group(s):
Estate Planning for the Year End and
Beyond
Private Clients,
Trusts & Estates
Many of you are undoubtedly concerned about how the ongoing economic turmoil affects your estate
planning. We thought it would be helpful to set out a number of observations in general terms and that
is the purpose of this Alert. As everyone’s situation is unique, we suggest you consider the points
raised in this Alert and contact us if you would like to explore any of them further.
Year-end Planning in a Distressed Economic Environment
The ongoing economic turmoil should not discourage you from engaging in your normal year-end
estate planning. Quite the opposite is true. Some options to consider include:
 The Annual Gift Tax Exclusion. One of the easiest ways to transfer wealth to the younger
generations is to make so-called “annual exclusion gifts” to your children and grandchildren (as
well as to any other individuals who are the object of your bounty). The amount of each such
annual exclusion gift, which can be made with no transfer tax consequence is currently $12,000
per donee. For married couples, however, with proper planning and structure, the amount can be
doubled to $24,000 per donee. For example, if A and B are married and have three children and
four grandchildren, A and B can give $24,000 to each child and each grandchild, for a total of
$168,000 each and every year.
o Such annual exclusion gifts may make more sense now than ever. For those of you who have
been making annual exclusion gifts with assets other than cash, such as partial interests in real
estate, interests in closely-held companies, or interests in publicly-traded companies, any
current depression in the market value would effectively enable you to transfer more of the
asset to your beneficiaries.
 Estate planning techniques benefiting from depressed values and low interest rates. There are a
number of estate planning techniques that are more likely to achieve their goal of transferring
value to the younger generations on a tax-favored basis in an environment that has both depressed
market valuations and low interest rates. The current alignment of those factors is as dramatic as
we can remember and may constitute a “perfect storm” favoring these techniques, which include:
o
GRATs. Many of our clients who own a concentrated position in a single company or other
holding, whether privately-held or publicly-traded, will use a so-called “grantor retained
annuity trust,” or “GRAT,” to transfer future appreciation of that holding to the younger
generations with virtually no transfer tax consequence. A GRAT provides for a series of
payments to the client, typically for a very few number of years, with any balance remaining at
the termination of the payments passing to your beneficiaries. GRATs achieve their purpose of
passing value to the younger generations only when the concentrated holding appreciates faster
than the current IRS interest rate. The interest rate applicable to a GRAT established in
November of 2008 will be 3.6%, and that represents a historically very low “hurdle” rate to
beat. That low interest rate, coupled with the current low market values of all manner of assets,
combines to create a very attractive environment for GRATs.
Estate Planning for the Year End and Beyond
o Sales to intentionally defective grantor trusts. Another technique is to sell an asset to a trust
known as an “intentionally defective grantor trust” for an interest-bearing promissory note. The
trust is designed so that the sale will not be recognized for income tax purposes. Similar to the
GRAT, this technique achieves its purpose of passing value to the younger generations only
when the asset sold to the trust appreciates faster than the interest rate under the note, so the
current combination of low interest rates and low market valuations makes for a very favorable
environment for this technique. Although there is this fundamental similarity between this
technique and a GRAT, there are a number of significant differences between the two which
may make one technique more attractive than the other for any particular client.
o Loans to children. A popular and fairly simple technique is to simply lend funds to one’s
children or grandchildren, leaving it to them to invest the borrowed funds in such manner as
they see fit. So long as the investments perform better than the minimum interest rate
applicable to the loan for tax purposes, value is moved to the younger generations on a taxadvantaged basis.
 Charitable giving. Year end is a traditional time to consider making charitable gifts. A common,
simple and tax-efficient method of making such gifts is to donate appreciated securities. This year,
there may be fewer candidates to fit that bill, and charitable inclinations in general may well be
dampened for some, but the present economic conditions may favor some alternative charitable
giving techniques:
o CLATs. A “charitable lead annuity trust,” or “CLAT,” is evocative in many ways of a GRAT.
A CLAT provides for a stream of payments to charity for a number of years, with any balance
remaining at the termination of the payments passing to your beneficiaries. Although CLATs
are really only appropriate for clients who are charitably inclined, if the assets contributed to
the CLAT appreciate faster than the current IRS interest rate, an ancillary and welcome benefit
will be that additional value will pass to your beneficiaries when the charitable payments end,
on a tax-advantaged basis. As in the case of a GRAT, the current combination of low interest
rates and low market valuations makes it more likely that a CLAT would achieve this family
benefit.
o Direct transfers from IRAs. The rescue package recently passed into law includes a provision
extending the prior ability to make a direct transfer of up to $100,000 from one’s individual
retirement account to charity. That provision had expired on December 31, 2007, but is now
available for both calendar years 2008 and 2009. This planning technique may be attractive for
some.
What’s Around the Corner?
The new year will bring many changes, some of which are now known and many of which are not.
 Increase in the annual gift tax exclusion. Beginning on January 1, 2009, the amount of each annual
exclusion gift which can be made with no transfer tax consequence will increase from $12,000 per
donee to $13,000 per donee.
 Increase in the estate tax exemption. The federal estate tax exemption amount and the closelyrelated and parallel provision of the generation-skipping transfer tax exemption amount will
increase on January 1, 2009 from $2,000,000 to $3,500,000. This is the largest single increase we
have ever seen and could have a dramatic impact on your estate planning because many estate
plans allocate assets at death among different beneficiaries according to a formula that is keyed to
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Estate Planning for the Year End and Beyond
the amount of this exemption. Hence, depending on the specifics of your situation, the increase in
the exemption could dramatically “skew” your estate plan.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding
penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter
addressed within.
Authors:
Kathryn G. Henkel
Kathryn.henkel@klgates.com
+1.214.939.5475
Kevin M. Meuse
Kevin.meuse@klgates.com
+1.617.951.9238
Mark W. Roberts
Mark.roberts@klgates.com
+1.206.370.8119
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