Firm Publications

Weathering The Storm

By Rebecca G. Doane, Esq., published in the 2009 winter issue of VIVE Magazine

If we listen to the news or read the newspaper on a regular basis, it is easy to come away with an overwhelming feeling of despair given our currently dire economic situation. Well there is a ray of hope—a virtual beacon of light upon which we can focus our attention. At the current time, we can aggressively take advantage of a government “freebie,” so to speak. Right now, at this very moment, you can and should be making certain that your estate plan takes advantage of the largest estate tax exemption ever granted by the U.S. government. Each individual is now entitled to a three and one-half million dollar estate tax exemption. For a married couple, that adds up to a combined seven million dollars in estate tax exemptions if your estate is properly planned. That means that now is the time to create your estate plan if you have not already done so—or the perfect time to have your current plan reviewed to make sure it is statutorily current and will afford your family the best tax protection available.

Additionally, for those individuals with assets valued in excess of 3.5 million dollars, and for couples with assets valued in excess of seven million dollars, now is the perfect time to think about making gifts to your children and grandchildren. We all know that real estate, marketable securities and most business values are at an extreme low. While this may seem like only depressing news, there are actually some opportunities presented due to the economic downturn. When asset values are lower, a parent or grandparent has an excellent opportunity to make gifts of assets at the reduced value for gift tax purposes. Currently, in addition to the $13,000 per person annual gift tax exemption, each individual can transfer assets worth up to one million dollars to children and grandchildren during that individual’s lifetime without any gift tax being imposed. For example, if you had a two million dollar rental property that, due to current market conditions, is now valued at one million dollars, you would have the opportunity to transfer that to your children or grandchildren utilizing your one million dollar gift tax exemption and incur no gift tax. A few years ago, when the same real estate was valued at two million dollars, such a transfer would have incurred a substantial gift tax. When the market finally recovers, all of the appreciation over the one million dollar value will have passed to your children free of gift tax, or estate tax upon your demise.

In addition to the opportunities presented by the lower asset values, the current low interest environment affords yet another estate planning advantage. Many of the advanced techniques to transfer wealth to younger generations are enhanced during periods of low interest rates. A simplistic example of the advantage of low interest rates is illustrated by intro-family loans. If, for example, a parent loans her child $1 million, the Internal Revenue Service now only requires an interest rate at a historically 1.9 percent. If the child invests that $1 million at a yield exceeding that 1.9 percent, the excess will pass to the child free of gift and estate tax. The advantage of that basic technique can be multiplied many-fold through family limited partnerships, grantor retained annuity trusts and other more sophisticated estate planning techniques.

There is one caveat of which you need to be aware. The estate tax exemption is currently a moving target. When doing estate planning, you need to understand that, under current law, the three and one half million dollar estate tax exemption per individual is in effect only during the calendar year 2009. In 2010, the estate tax goes away completely. However, under current rules, in 2011 and thereafter, the amount that can pass estate tax-free is only one million dollars per person. Although many tax planning professionals predict Congress will act to freeze the three and one-half million dollar per person exemption, we have no guarantee of that proposition. We will have to “stay tuned” to see what actually happens. However, in the meantime, the combination of low asset values and low interest rates provide a golden opportunity which we should not allow to pass us by. You have worked all your life to protect your loved ones, so what better time than the present to secure your legacy for immediate and future generations. A quick review of your current situation or an informal assessment of your existing estate planning documents will provide you with some important guidelines that, when handled properly, will afford you and your family a priceless intangible—peace of mind!