Now is a great time to transfer wealth

Business owners are taking advantage of the combination of historic highs for estate and gift tax exemptions, low business and investment valuations and extremely low interest rates to transfer and protect wealth – and uncertainty in the long-term stability of the estate and gift tax laws has many considering whether the time to act is now.

Currently, you may transfer up to $5 million of assets during your lifetime or at death without paying any estate or gift taxes. Absent Congressional action, the exemption amount is scheduled to decrease to $1 million in 2013.

If you desire to reduce the amount of your assets that are subject to the estate tax at your death and are willing to make transfers to your heirs now, there are huge opportunities to make these transfers now with little or no gift tax consequences. Here are a few strategies that clients are finding attractive in the current financial environment.

Transfers to dynasty trusts

With the ability to transfer up to $5,000,000 of assets gift-tax free, now is the perfect time to consider transferring assets to a dynasty trust. Assets held in a dynasty trust can be used for the benefit of your spouse and heirs while at the same time providing protections for generations to come. A properly structured dynasty trust can provide beneficiaries with creditor protection, protection from division in divorce and avoidance of transfer (estate and generation-skipping) taxes in perpetuity if desired. Transferring assets that you expect to increase in value, such as closely-held business interests, is a great way to leverage this technique.

Grantor retained annuity trust (GRAT)

A GRAT may be a great fit if you want to transfer assets to your heirs but do not want to use much, if any, of your $5 million gift tax exemption. When you transfer assets to a GRAT, you receive annuity payments from the GRAT for a fixed term of years. Any assets remaining in the GRAT at the end of the annuity term pass to your heirs. This remainder is the “gift” portion of the GRAT.

The GRAT rate in October is 1.4 percent, an all-time low. When interest rates are low, an annuity interest is worth more, which means that the taxable gift has a lower value. If the GRAT assets produce income or appreciate in value in excess of the applicable rate, this excess amount results in a tax-free gift to your heirs.

Note, the Obama administration has proposed making changes to the laws regarding GRATs that would reduce their effectiveness. Therefore, you should not hesitate too long if the use of a GRAT would be of benefit to you.

Charitable lead annuity trust (CLAT)

For individuals with charitable intentions, a CLAT is an effective tool to not only benefit charity, but also to transfer wealth to your heirs. A CLAT operates in a manner similar to a GRAT in a low interest rate environment. The annuity payments are made to charity, rather than to you. The value of the annuity, calculated under the rate, qualifies for the charitable deduction. Assets left over after the charitable term then pass to your designated heirs.

Sale to an intentionally defective grantor trust (IDGT)

Depressed assets combined with a low applicable federal rate (AFR) make the perfect combination for this technique. With a sale to an IDGT, assets that you expect to appreciate are sold to the IDGT in return for an installment note. The interest rate for the note will typically match the AFR in effect when the note is created. The transaction is successful if the growth of the assets is in excess of this rate. For loans greater than nine years, the October AFR for loans compounded annually is 3.51 percent.

The IDGT is considered owned by you for income tax purposes but not for estate tax purposes. This means that the sale to the IDGT does not generate any capital gains taxes. Further, you pay the income taxes of the IDGT which results in a additional tax-free gift to the IDGT of that amount.


The depressed value of assets and the low interest rates are a potent combination – particularly when viewed in conjunction with the most permissive estate and gift tax environment to date. Business owners and other individuals concerned about the impact the estate tax may have on their families should, therefore, take seriously the huge opportunities afforded them to transfer wealth at this time. We are unable to predict how long these opportunities will last.

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