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Seize the Opportunity to Freeze Your Estate at Today’s Values

04/26/2009

This is the eighteenth in a series of brief articles that Moye White is sending to its clients and friends to provide practical insight about the opportunities and challenges presented by today's economy.

In our current uncertain economic environment, values of real estate, business interests, and other assets have dropped significantly. Likewise, interest rates are at historical lows. Implementing an estate tax freezing strategy is an excellent way to capitalize on the down economy. An estate tax freeze is a powerful element of a comprehensive estate plan that can reduce estate tax while also accomplishing other goals.

A comprehensive plan begins with fully utilizing an individual’s estate tax credit. The current estate tax credit is $3.5 million per individual. For a married couple with an appropriate estate plan in place, the estate tax credit can shelter $7 million. An estate that is currently valued at less than the estate tax credit could increase significantly if it contains a highly appreciable business interest or piece of property. These types of assets are ripe for an estate tax freeze transaction.

While technical and specific to the person and to the circumstances, the general purpose of an estate tax freeze is to freeze the value of an asset in a person’s estate at today’s low values. The Grantor transfers/sells the asset to an irrevocable trust for the benefit of the younger generation or Remainder Beneficiaries. The Grantor may still own and control the asset; however, any future appreciation is transferred to the Remainder Beneficiaries. The future appreciation is out of the Grantor’s estate and therefore will not be considered in calculating estate tax due upon the Grantor’s death.

A variety of techniques can be used to achieve an estate tax freeze that serves a number of different goals:

  1. Qualified Personal Residence Trust (“QPRT”). The Grantor can transfer a principal residence or a family vacation home to a QPRT to hold for a term of years, after which the property will pass to the Remainder Beneficiaries. The structure of a QPRT balances a significantly reduced gift tax cost with a mechanism to jointly manage the property, while permitting continued use by the Grantor.
  2. Grantor Retained Annuity Trust (“GRAT”). A Grantor can transfer a highly appreciable asset to a GRAT in exchange for an annuity for a term of years, after which the remainder (growth in excess of the discount rate) will pass to the Remainder Beneficiaries. A GRAT is also structured with minimal gift tax cost, ongoing income to the Grantor for a term of years and, depending on the nature of the asset, continued control. The two year rolling GRAT technique is an additional tool to enhance the effectiveness of the freeze transaction.
  3. Intentionally Defective Grantor Trust (“IDGT”). With this technique, the Grantor creates an irrevocable IDGT and sells a highly appreciable asset to the IDGT in exchange for an installment note established on arms-length terms. The IDGT makes installment payments to the Grantor similar to how the GRAT makes annuity payments to the Grantor. However, the IDGT is drafted so that the Grantor pays the income tax generated by the assets owned by the IDGT, contrary to the treatment of other irrevocable trusts where the trust pays the income tax on the assets it owns. Therefore, when the Grantor pays the IDGT’s income tax, the Grantor is making another gift tax-free transfer to the trust beneficiaries. These payments of income tax also have the effect of reducing the Grantor’s estate. Thus, the IDGT structure has more potential for growth of principal, resulting in more value being transferred to the trust beneficiaries at the end of the note term.

While it may feel comfortable to use a cautious wait-and-see approach when managing one’s estate in an uncertain economy, there are tools that work optimally in this type of environment. The benefits can far outweigh the risks. There are collateral benefits as well, such as engaging the entire family in a plan to manage and preserve hard-earned assets and taking control when the economic environment feels uncontrollable.

The attorneys at Moye White LLP are ready to explore strategies with you and your professional advisors to plan and implement the most effective estate tax freeze strategy to fit your needs and goals.

ANY STATEMENTS REGARDING TAX MATTERS MADE HEREIN, INCLUDING THOSE IN ANY ATTACHMENTS, ARE NOT INTENDED OR WRITTEN TO BE USED OR RELIED UPON, AND CANNOT BE USED OR RELIED UPON BY ANY PERSON TO AVOID TAX PENALTIES. FURTHER, TO THE EXTENT THIS COMMUNICATION CONTAINS A TAX STATEMENT OR TAX ADVICE, MOYE WHITE LLP DOES NOT AND WILL NOT IMPOSE ANY LIMITATION ON DISCLOSURE OF THE TAX TREATMENT OR TAX STRUCTURE OF ANY TRANSACTIONS TO WHICH SUCH TAX STATEMENT OR TAX ADVICE RELATES.

For more information contact: Marilyn McWilliams, Scott Greiner or Ted White, Chair, Transaction Section at (303) 292-2900.

If you prefer not to receive any unsolicited e-mails regarding Moye White information, please contact us at info@moyewhite.com.

Moye White LLP has prepared this bulletin to provide general information; however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.

ABOUT THE AUTHOR

Scott P. Greiner, LL.M. (Tax)

Attorney

Marilyn W. McWilliams

Attorney

Edward D. (Ted) White

Attorney