Continuing Estate Planning Opportunities

June 2009
Continuing Estate Planning Opportunities
Practice Group(s):
2009 has brought a number of changes to our country, including many changes, which have had a
direct impact on estate, gift and income tax planning for individuals. Because we feel it is essential for
our clients to be aware of these changes, their effect and the potential tax-savings opportunities that
they may present, we have put together the following list of highlights for you to consider.
If you are interested in learning more about any one or more of the topics below, please feel free to
contact our offices.
Private Clients,
Trusts & Estates
Changes in Laws Affecting Estate and Gift Taxes
In 2009, the following increases in tax exemptions and exclusions occurred:
 Single Largest Increase in Estate & Generation-Skipping Transfer Tax Exemptions – The
estate tax exemption and generation-skipping transfer tax exemption each increased from $2
million to $3.5 million per United State citizen or resident.
 Annual Gift Tax Exclusion – Individuals can now give up to $13,000 per donee annually or
$26,000 per donee for married couples, without incurring any gift tax consequences provided the
gift is in a qualifying form.
 Annual Gift Tax Exclusion for Non-citizen Spouses – The annual giving limit for gifts to a noncitizen spouse increased to $133,000.
Tax-Savings Opportunities in Current Market & Low Interest
Rate Environment
Depressed market values and low interest rates provide an ideal environment for a number of
leveraged lifetime gifting, or “estate-freeze”, strategies, which can result in dramatic transfers of
wealth to next generations in a tax-favorable fashion. Examples of some of these strategies are as
 Grantor Retained Annuity Trusts (GRATs) – A GRAT is a vehicle through which an individual
can transfer to a trust for a term of years assets which are expected to appreciate at a rate faster
than the interest rate prescribed by the IRS at the time of transfer. There are virtually no gift tax
consequences on the initial transfer, and at the end of the term of years, any remaining property
over and above the initial transfer value plus interest at the prescribed IRS rate will pass to the
remainder beneficiaries provided for in the GRAT – estate, gift, and income tax free.
 Sales to Intentionally Defective Grantor Trusts (IDGTs) – A sale to an IGDT involves selling
an asset to a trust in exchange for a promissory note for the fair market value of the assets and
interest at the applicable federal rate at the time of the transfer. During the term of the note, interest
will be paid annually and the principal will be paid in a balloon payment at the end of the term of
the note. If properly structured as a grantor trust, this will leave the remaining property over and
above the value of the initial sale plus interest at the prescribed IRS rate to pass to the remainder
beneficiaries-estate, gift, and income tax free.
 Charitable Lead Trusts (CLTs) – With a CLT, a donor transfers assets to a trust, which will
distribute an annual income amount to one or more charitable organizations for a certain period of
Continuing Estate Planning Opportunities
time. At the end of the term, the remaining assets will pass to beneficiaries determined by the
donor at the inception of the CLT – likely the donor’s next generation. Although a CLT typically
results in some gift or estate tax, such taxes will be greatly reduced with the current low interest
rates and depressed asset values. This is an excellent option for those of our clients that are
charitable inclined.
 Intra-Family Loans – The extremely low interest rate environment also provides simple taxsavings opportunities for individuals, such as lending funds to younger generations. Quite simply,
if the borrower invests the case he or she borrows and earns a rate of return greater than the IRSprescribed “applicable federal rate” determined at the time of the loan (which have been at
historical lows in the past few months). All of this excess appreciation will belong to the
child/grandchild transfer-tax free.
Although the IRS interest rates used in leveraged gifting techniques described above remain very low,
they are starting to increase from their all-time low earlier this year; therefore, if you are interested in
taking advantage of any of the opportunities described above, we recommend that you contact our
offices to discuss which techniques are most appropriate for you and your family.
Potential Future Changes in the Laws
Over the past several months, numerous proposals have been circulated by both members of Congress
and the Obama Administration that could affect the estate and gift tax laws. In conjunction with our
Tax Policy Practice Group, we are closely monitoring these developments. We are unable to predict
whether or in what form future statutory changes will take place. However, if they occur in the manner
that is currently being discussed, they may have a significant direct impact on estate planning and on
the availability of some of the techniques discussed above. These include proposals that affect the
valuation of closely held business interests transferred to family members, the permissible length for
the term of a Grantor Retained Annuity Trust, estate and gift tax rates, and the amount of the estate
and gift tax exemptions.
If you would like to review any of these issues further, please contact your K&L Gates Private Clients,
Trusts & Estates lawyer.