Turbulent Economic Times Can Lead to Estate Planning Opportunities
Written on July 4, 2010 – 11:42 am | by melissatriddle
The recent downturn in the economy led to tax planning opportunities for individuals with a taxable estates.The downturn in the real estate market in the results outright gift, split purchase or donation of property to a qualified personal residence trust (QPRT) increasingly attractive . Pressure on property prices means more goods away free of gift tax may be only a few years ago. When the property market recovers in the future, the valuation of the property to the beneficiaries of these strategies.
An example of the savings may be a feature that's worth $ 1,500,000 in January 2007, when the IRC 7520 was 5.6% are. Contribution of property by a 75-year taxpayer to a ten-year QPRT would have led to a donation of $ 661,260. Assuming that the property value had dropped to $ 1,000,000 in January 2009, the gift of the property to a ten-year QPRT would have led to a donation of $ 599.680. If the property market recovers and the property is worth $ 2,000,000 ten years from now, the taxpayer would have removed a two million U.
S. dollars owned by his or her estate while using only $ 599,680 of gift tax exemption – a discount of approximately 70% of market value. In an attempt to boost the economy, the Federal Reserve lowered interest rates. The reduction in interest rates also makes certain planning strategies more viable. Suppose the taxpayer has an asset such as a company, which he believes will appreciate 12% per annum for the next few years. The taxpayer can contribute the stock of the company valued at $ 1,000,000 to two years, Grantor Retained Annuity zero-out Trust or "large".
If the contribution is made in January 2009 and the business really appreciate at the rate of 12% for the remainder beneficiaries at the end of the period of two years would be $ 156,068. Because the large zero-out for gift tax purposes, that amount goes to the beneficiaries estate and gift tax free. This strategy results in a gift or estate tax savings of $ 70,231 under current law (the tax on $ 156,068). Had the same strategy a few years ago, when the IRC 7520 was 5.6%, while the rest left to pass to the beneficiaries would be only $ 104,539.
Another good freeze strategy that works especially well when interest rates are low is an Intentionally Defective Grantor sale to a Trust. A taxpayer sells an asset that he or she expects in the future to appreciate a special type of trust known as a Defective Grantor Trust intentionally (IDGT). The IDGT mentioned as being deliberately flawed, because it is the alter-ego of the taxpayer for income tax. For example, the taxpayer sells an appreciation of the assets with a current value of one million U.
S. dollars to IDGT. IDGT the is the alter-ego of the taxpayer for income tax, so there is no recognition of gain on the sale of assets to the IDGT. The sale of the asset in exchange for a twenty year promissory note. The long-term applicable federal rate for January 2009 is 3.57%, so the promissory note to one percent of that amount or more. If the asset was sold to the IDGT were appreciating at 8% per year in the twenty years life of the transaction, would be $ 1,479,609 left in the trust after the repayment of the note in two decades.
This strategy removes that amount from the estate of the taxpayer, for a savings of $ 665,824 in gift packaging, or estate taxes under current law.One final strategy that works better in a low interest rate is a Charitable Trust or Annuity Lead CLAT. A CLAT is a strategy where the planning of a charity or charities have a fixed annual amount paid from a fund for a period of years or for life, with the rest being distributed to children or other specified beneficiaries at the end of duration. If properly structured, a CLAT can be used for all taxing property at death, while benefiting charity.
When interest rates are low the annual installments to be paid to the charity to raise the inheritance tax are relatively low.