Income and Estate Planning Advisory
December 2008
Depressed portfolio values and historically low interest rates have converged to produce tremendous financial and estate planning opportunities. Some of these opportunities may be short-lived given the evolving regulatory environment. A new President and a new Congress are virtually certain to bring changes to existing tax laws. Many estate planning professionals are concerned that certain planning opportunities such as grantor retained annuity trusts and family limited partnerships are likely to be greatly constrained, if not eliminated after 2008. If you are interested in learning more or pursuing any of the planning opportunities described below, we would be happy to assist you.
Managing Income Taxes
Clients with capital losses may want to consider the benefit of harvesting those losses in 2008. Capital losses may be used to offset capital gains and may also be used to offset a portion of ordinary income. Excess capital losses may be carried forward.
Clients who are lucky enough to have appreciated assets may want to consider taking advantage of historically low capital gains rates.
Annual Exclusion Gifts
In 2008, the annual exclusion from gift tax (i.e. the amount which each taxpayer may gift to any individual without paying any gift tax or using any portion of the taxpayer’s gift and estate tax exemption) is $12,000. Married couples may combine their annual exclusions to make gifts up to $24,000 per donee in 2008. The annual exclusion will increase in 2009 to $13,000 per donee (or $26,000 per donee for a married couple).
Making annual exclusion gifts with depressed marketable securities allows clients to leverage their gifts and allow their children or grandchildren to benefit from the future appreciation of the gifted securities.
Many clients use annual exclusion gifts to fund educational trusts or 529 college savings accounts for their children or grandchildren. The IRS permits a taxpayer to “front-load” a 529 college savings account by pre-funding the account with an amount equal to five years of annual exclusion gifts. In 2008, therefore, a single donor may fund a child’s or grandchild’s 529 college savings account with $60,000 (or a married couple may fund a child’s or grandchild’s 529 college savings account with $120,000).
Annual exclusion gifts may be further leveraged by implementing a family limited partnership. A gift of limited partnership interests will not only reflect the depressed value of the underlying asset (i.e. marketable securities, real estate, closely-held business interests or any other asset), but may also reflect a discount for the lack of control or lack of marketability associated with the gifted partnership interest.
While the IRS has recently succeeded in attacking some family limited partnerships, a properly structured and administered family limited partnership remains a viable planning tool.
Grantor Retained Annuity Trusts
The grantor retained annuity trust (GRAT) offers an opportunity to gift appreciating assets with little or no gift tax while retaining an annuity interest in the trust assets for a specified term of years. The initial transfer of assets to the trust is a gift for gift tax purposes; however, the value of the gift is determined by reference to an imputed rate of return (published monthly by the IRS). To the extent that the transferred assets appreciate at a rate in excess of the imputed rate of return, the excess appreciation is transferred to the ultimate beneficiaries free from gift or estate tax. Because the imputed rates of return are at historical lows (the December 2008 rate is 3.4%) and the assets to be contributed may have a depressed value, this is an exceptionally attractive environment in which to establish a GRAT.
Charitable Rollovers from IRAs
In 2006, Congress passed a law permitting individuals older than 701/2 to distribute up to $100,000 per year from traditional or Roth IRAs directly to charitable organizations (other than donor advised funds, supporting organizations, private nonoperating foundations or charitable remainder trusts) without including the contribution in gross income. That law was recently extended for calendar years 2008 and 2009. Taxpayers who are subject to the cap on annual charitable contribution deductions or who are subject to the phase-out of other itemized deductions based upon their adjusted gross income may benefit from this opportunity.
Increase in Estate Tax Exemption
The federal exemption from estate tax and generation-skipping transfer tax will increase from $2,000,000 in 2008 to $3,500,000 in 2009. The exemption from Minnesota estate tax is $1,000,000 and is not scheduled to increase at this time. Many estate plans are drafted to allocate assets among trusts or beneficiaries based upon a formula tied to the federal estate tax exemption. The increase in the federal estate tax exemption (and the increased discrepancy between the federal and Minnesota estate tax exemptions) could have a dramatic effect on your estate plan. Depending on your personal circumstances and estate planning objectives, your estate plan may no longer be appropriate. We strongly recommend that you review your estate plan to ensure that it continues to reflect your intentions.
* * *
The changing regulatory environment, depressed markets and historically low interest rates have converged to present taxpayers with reason to review their estate plans and to consider new estate planning strategies. The estate planning attorneys at Fredrikson & Byron are on hand to consult with you regarding your estate plan and the planning opportunities discussed in this advisory.
*Required IRS Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. 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 matters addressed herein.*