Super Committee Action May Limit Estate Planning Options
By: Stan Miller
In reaching an agreement to raise the debt ceiling, the Republicans in the Congress reached an agreement with President Obama to create a 12 member committee comprised of 6 senators and 6 congressmen who are charged with making an omnibus proposal to reduce the federal deficit. The Joint Select Committee on Deficit Reduction (the “Super Committee”) is scheduled to announce its proposals on November 23. The proposals may include changes in the current estate, gift and generation-skipping transfer tax laws. In particular, some observers close to the process have expressed concern that the Federal gift tax exemption could be reduced from the current $5 million to $1 million, possibly as soon as December 31 or, while less likely, as early as the November 23 announcement date. Thus, clients may wish to consider making use of their gift tax exemptions in the next few weeks. Several other estate planning techniques that are currently effective may be impacted by law changes coming out of this committee. Some of these include:
Use of $5 million Federal gift tax exemption. The current Federal gift tax exemption of $5 million (or $10 million for married couples who elect to split gifts) is scheduled to revert to $1 million (or $2 million for married couples who elect to split gifts) on January 1, 2013. A proposal was submitted to the Super Committee to accelerate the return to the $1 million Federal gift tax exemption one year earlier, on January 1, 2012 (less than 2 months from today). Some observers believe the reversion could be accelerated to a date as early as November 23rd of this year. Accordingly, clients who have been considering planning may wish to consider making immediate gifts to use part or all of the $5 million (or $10 million) Federal gift tax exemption this month.
Interest Rate Sensitive Transactions. The applicable federal interest rates for intra-family loans for November 2011 are at historic lows: 0.19% (for loans up to 3 years), 1.20% (for loans greater than 3 years and up to 9 years) and 2.67% (for loans greater than 9 years). In light of these low interest rates, clients may wish to consider making low-interest loans to family members or to trusts for their benefit or refinancing any loans that are currently outstanding. Several of the most effective transactions we recommend to clients are particularly effective in this interest rate environment, and are made more effective implemented in conjunction with the use of some or all of the $5 million gift tax exemption.
Funding Large Life Insurance Transactions. The combination of the ability to make $5 million dollar gifts to multi-generation self-settled dynastic trusts coupled with the ability of clients to make additional low interest rate loans to those trusts (sometimes with a self-cancelling feature) has created an environment that is particularly attractive in funding large purchases of life insurance. The leverage offered by this combination of rather simple techniques allows significant amounts of wealth to be protected inside asset protection trusts where it can be accessed as a future source of retirement income for the grantor as well as a divorce, lawsuit and estate tax protected inheritance for families for generations.
Discount Entities (Family Limited Partnerships and Family Limited Liability Companies). The use of discount entities has been a target of many in the Congress for some time, and even more so now that several recent cases won by taxpayers have effectively utilized the technique. There is one proposal currently before the Super Committee, that would significantly curtail the availability of discounts associated with gifts or other transfers of interests in certain limited partnerships or other entities. Clients should seriously consider establishing an entity now and then transferring the interests in a gift or sale transaction to take advantage of potential valuation discounts that may soon be unavailable.
Grantor Retained Annuity Trusts (“GRATs”). There have been a number of proposals, including one that is currently before the Super Committee, to require that GRATs have a minimum term of 10 years. There are certain benefits associated with shorter-term GRATs. Clients who can benefit from this strategy should do so promptly.
Charitable Lead Annuity Trusts (“CLATs”). Clients who are charitably motivated may be interested in creating a CLAT to fund those gifts since a CLAT is particularly effective in transferring wealth to family members in a low-interest-rate environment. In addition, a lifetime CLAT may take advantage of charitable deductions that may become more limited in the future.
If you would like to discuss any of these techniques, please contact one of the attorneys in our estate, trust and asset protection planning group.
Please call Valerie Hardin to schedule a call or meeting with an attorney at 501-221-7776, or email her at firstname.lastname@example.org