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End of Year Planning Opportunities

11/29/2010 Articles

With 2010 quickly coming to a close, we would like to take the opportunity to remind you of several remarkable planning opportunities that should be considered before year-end.  

‘Tis the Season for Gifting
Currently at 35%, the gift tax rate is the lowest it has been since 1934, but barring Congressional action, it will rise to 55% next year.  This fact, when combined with the temporary repeal of the generation-skipping transfer (GST) tax during 2010, means that there has never been a better time, nor will there likely be a better time in the foreseeable future, to transfer wealth.  Gifts to grandchildren are particularly appealing right now as a person wishing to give a grandchild $1 million would pay $350,000 in taxes in 2010 rather than approximately $1.4 million in 2011.[1]  Moreover, unlike gifts which are tax exclusive, property passing at death is tax inclusive.  Therefore, tax savings from making a gift can be significant when compared to the taxation of bequests, even if the tax rate is the same.[2]

Gifting of Depressed Assets/ Discount Valuations
In addition to low gift tax rates, the current financial environment presents an opportunity to transfer assets that are currently appraised at much less than their future expected value.  Combine an already low fair market value with discounts available for the transfer of business entities and real estate, and significant amounts of wealth can be transferred with little gift tax. 

Trust Distributions to Grandchildren
As discussed above, the repeal of the GST tax presents the opportunity to prevent estate taxation for several generations.  If you currently serve as the trustee of a trust that is not exempt from GST tax, you should consider making outright distributions to grandchildren or even great-grandchildren as in all likelihood this is a once in a lifetime opportunity that can save an enormous amount in transfer taxes. [3]

GRATs Offer a Tax-Free Method to Transfer Beaten-Down Assets to Children and Grandchildren
One technique involving gifting that is particularly effective right now is the use of a Grantor Retained Annuity Trust ("GRAT").  You would establish a GRAT by transferring assets into a trust for a specified length of time, and would receive an income stream (a fixed-dollar annuity payment) during the trust's term.  At the end of the term, any appreciation in the trust beyond the so-called "hurdle rate" (currently at an all-time low of 1.8%) is passed gift tax-free to your designated beneficiaries.  Therefore, if assets that are expected to have a sharp increase in value during the term of the GRAT are used, significant wealth can be transferred free of gift or estate tax. 

Legislation pending in Congress would lengthen the minimum term for GRATs to 10 years, thereby limiting their effectiveness (since the death of the grantor during the term of the GRAT causes the assets to be brought back into his estate).  Therefore, if you are interested in utilizing the GRAT technique, we strongly suggest that you act quickly.     

CLATs Maximize Charitable Giving
For the charitably inclined, the time has never been better for establishing a Charitable Lead Annuity Trust ("CLAT").   A CLAT is structured similarly to a GRAT, but would provide charitable organization with an income stream (a fixed-dollar annuity payment) during the term of the CLAT with any assets remaining in the CLAT passing gift tax free to your designated beneficiaries.  As long as the CLAT assets outperform the hurdle rate (currently 1.8%), then the designated beneficiaries will receive some assets when the CLAT terminates.  In addition, CLATs are attractive because they can be designed to offer a large income tax deduction at their creation.

Roth IRA Conversion
Another strategy worth considering is to convert traditional IRAs to Roth IRAs.  The Roth IRA allows for tax-free growth, is not subject to income taxation when money is withdrawn, and does not require mandatory distribution requirements when the account holder reaches age 70; however, any assets converted are subject to income tax at the time of conversion.[4] Now may be a good time to convert accounts with depressed values, thereby locking in the income taxes at their lowest cost and allowing for the account's rebound to be income tax free.  

A conversion might also be attractive if you have net operating losses or charitable deductions that can not otherwise be utilized.

Low Interest Rate Family Loans
Given that interest rates applicable to intrafamily loans are at all time lows, taxpayers can make loans to family members, either outright or in trust,  and shift considerable wealth to the younger generations. The Applicable Federal Rates published by the IRS are currently 0.35% for a loan term of up to 3 years and 1.59% for a loan term of up to 9 years.  If the borrower invests the money, any appreciation will completely escape transfer taxation and will be taxed at the borrower's potentially lower income tax bracket.


If you would like to discuss any of the issues raised in this Farella Family Wealth Update, or any other estate planning concerns, please contact your Farella Family Wealth attorney at 415-954-4400 or 707-967-4000.

Evan Abrams
George Argyris
Fred Caspersen
Lara Gilman
Michael Korbholz
Genevieve Larson
Barbara Murphy
Kate Ohlandt
Kristine Waggener
Mark Weaver

This information is provided as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.


[1] This alert assumes that the donor had utilized her $1million lifetime transfer tax exemptions prior to making any gifts in 2010 or 2011.

[2] For example, assuming a gift and estate tax rate of 50%, a gift of $1 million would require assets of  $1.5 million, whereas a bequest of $1 million would require an estate of $2 million.

[3] If you are hesitant to make such an outright gift, the transaction may be structured so that benefits to the grandchild can be managed (e.g., by using an LLC interest or nonvoting corporate stock).

[4] The Internal Revenue Code allows for payment of the tax in 2011 and 2012, but at rates in effect for those years which may be higher than current income tax rates.

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