Historically Low Interest Rates:
Effective October 1, 2011, the Internal Revenue Service (the “IRS”) has substantially reduced the already low interest rates governing a wide variety of estate planning strategies.  For a limited time, these historically low interest rates provide tax saving opportunities for lifetime gifting techniques of all kinds, including grantor retained annuity trusts (“GRATs”) and intra-family loans (including those used in connection with sales to family trusts).  These techniques may provide substantial transfer tax savings, especially given the current depressed values of assets.

GRATs.   A GRAT is a technique by which an individual transfers assets to a trust and over the term of the trust is paid back the assets’ value (at the time of transfer), in addition to interest based upon an IRS mandated interest rate known as the Section 7520 rate.  To the extent the transferred assets appreciate over the term of the trust at a rate in excess of the Section 7520 rate, the excess appreciation will pass to the transferor’s beneficiaries- transfer tax free.  For GRATs funded in October 2011, the Section 7520 rate will be 1.4%.  The October rate will be the lowest the rate has been since its inception in 1952 and 0.6% lower than September 2011’s rate.  To put this rate in historic context, note that the rate was 8.2% in June of 1997.  If assets transferred to a GRAT funded in October 2011 appreciate at a rate in excess of 1.4%, any additional appreciation will pass transfer tax free to the transferor’s beneficiaries.

Loans.   The IRS mandated interest rates for intra-family loans (for example, if a parent loans money to a child to purchase a home or to finance a business opportunity) are based upon the loan term.  For short term loans (3 years or less) implemented in October, the rate will be 0.16%.  For mid-term loans (more than 3 years but not more than 9 years), the rate will be 1.19%.  For long term loans (more than nine years) the rate will be 2.93%.  If assets loaned to a family member (or a trust for his/her benefit) appreciate in excess of the applicable loan interest rate, the excess appreciation will pass to the family member transfer tax free.

Limited time frame.   These rates are reset monthly and may increase on November 1, 2011.

The Tax Relief Act of 2010:
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”) was enacted on December 17, 2010. The Act creates a variety of estate and gift planning opportunities; however, since the Act expires on December 31, 2012, there is limited time to take advantage of these opportunities.  For 2011 and 2012, the Act reunified the federal gift and estate taxes, increased the federal estate, gift and generation skipping transfer (“GST”) tax exemptions to $5 million and reduced the federal estate, gift and GST tax rates to 35%. 

These changes have created significant opportunities for clients interested in lifetime gifting.  The increased gift tax exemption enables individuals to make lifetime gifts totaling up to $5 million (or up to $10 million per married couple) without incurring gift tax.  Additionally, under the Act, each person may transfer up to $5 million during his or her lifetime to grandchildren without incurring federal gift or GST tax.   However, the Act expires on December 31, 2012.   Unless new legislation is enacted, beginning on January 1, 2013 the federal estate, gift and GST tax exemptions will revert to the 2001 level of $1 million and the tax rate will increase to 55%.  Therefore, there is a limited window to take advantage of the opportunities provided by the Act.   

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Please contact any of the following attorneys in Pabian & Russell, LLC’s Estate Planning Department to discuss the best vehicle in which to take advantage of the opportunities outlined above, as well as any necessary changes to your existing estate planning documents.

Jay M. Pabian
jpabian@pabianrussell.com

Robert M. Russell, Jr.
rrussell@pabianrussell.com

Steven M. Carr
scarr@pabianrussell.com

Karyn M. Ellinger
kellinger@pabianrussell.com

Sarah M. Allen
sallen@pabianrussell.com

Pamela L. Sywak
psywak@pabianrussell.com

Marlee Cowan
mcowan@pabianrussell.com