Planning After ATRA

After years of flux, the federal estate, gift and generation-skipping transfer (GST) tax laws have finally settled into a "permanent" state. With the enactment of the American Taxpayer Relief Act of 2012 (ATRA) as of January 2013, for the first time in over a decade, the federal estate tax statutes do not have built-in expiration dates and the uncertainty that came with the scheduled changes.

Now that the $5,250,000 federal estate, gift and GST tax exemptions are permanent and will continue to increase based on automatic annual inflation adjustments, the decision-making process for making significant gifts has changed for many individuals. The "use it or lose it" atmosphere that influenced planning decisions to capture larger exemptions (and thus accelerated the gifting process for many individuals) is gone.

The stability in the transfer tax laws, however, does not change the opportunities for making gift transfers. For example, maximizing the use of annual exclusion gifts, now permitting gifts of $14,000 per donee, will always be a strategic way to benefit family members. In addition, we continue to be in a period of historically low interest rates, which make transactions permitting the transfer of wealth using little or no gift tax exemption very appealing. A brief summary of some planning techniques that take advantage of the low interest rate environment follows.

Grantor Retained Annuity Trusts (GRATs). GRATs are designed to transfer future appreciation without any gift or estate tax charged on that growth. The trustee of the GRAT annually pays to the person setting up the trust (the grantor) a designated percentage of the initial fair market value of the trust for the term of the trust, say two years. That percentage is based on the prevailing federal interest rate for the month that the GRAT is funded. The assets originally transferred to the trust, plus interest, are thus returned to the grantor. Any growth in excess of the applicable annual interest rate is accumulated in the trust and, so long as the grantor is living at the end of the trust term, passes to children(or other beneficiaries) free of tax. GRATs offer the potential for transfers to the next generation without tax cost because they can be "zeroed out" for gift tax purposes. More important, they offer that potential with no significant tax risk, because they have been specifically approved by the IRS. Sales or Loans to Grantor Trusts. Similar to a GRAT, a sale or loan...