Type: Law Bulletins
Date: 06/30/2010

Estate Tax Savings Opportunities Continue In 2010

It is hard to believe – or maybe it’s not – that half of 2010 has passed and we still have no guidance from Congress on the repealed federal estate tax and the 2011 estate tax. During this unusual time, tax savings opportunities continue.

Grantor Retained Annuity Trusts or GRATs

GRATs allow you to make a gift to children with nominal gift tax impact.

The success of a GRAT depends on the market performance of the assets that the grantor – the creator of the trust – places in the GRAT for a set term, such as two years. Usually the grantor transfers business interests or marketable securities to the GRAT. These assets must outperform the rate of return assumed by the IRS. That rate is an exceptionally low 2.8% for July. The amount by which they outperform the assumed rate passes to children with little or no gift tax.

This opportunity may not last. Bills introduced in Congress would limit the availability of GRATs by requiring that the term of a GRAT be at least 10 years. Because the grantor of a GRAT must survive to the end of the GRAT term for the GRAT technique to succeed, we often use relatively short terms.

Business succession planning

Business owners should establish effective business succession plans. These plans can enable an owner to pass economic interests in a business to children and grandchildren while retaining control. GRATs are particularly well suited for business succession plans.

Updating plans for 2011

Plans should be updated in anticipation of unfavorable estate tax laws slated to take effect on January 1, 2011. At that time, the estate tax exemption will drop to $1 million (from $3.5 million in 2009) and rates will increase to 55% (from 45% in 2009). Basic tools such as “credit shelter” and life insurance trusts, teamed with proper titling of assets and beneficiary designations, can be used to save, at a minimum, hundreds of thousands of dollars.

Taft’s Private Client group lawyers are available to help clients analyze opportunities for tax savings and address issues with respect to estate, gift, and generation-skipping planning. We encourage you to contact us with any questions.

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