Two Estate Planning Opportunities To Think About Now and Act On Before Late Fall

Two Estate Planning Opportunities To Think About Now and Act On Before Late Fall
June 7, 2012

Opportunity No. 1: Enhanced Gifting

As you are doubtless aware, aside from the federal income tax reductions that are scheduled to expire at the end of this year, there are important estate, gift and generation-skipping breaks that will go away if Washington does nothing. In short, the current estate, gift and generation-skipping tax exemptions will go from $5,120,000 to $1,000,000 (with inflation adjustments) at midnight December 31, 2012. At the same time, the estate, gift and generation-skipping tax rates will jump from 35 percent up to a maximum of 55 percent.

What does this mean for your planning?

If you can make substantial gifts to family members or others, either outright or in trust, and want to do so, this is the time to do it. If you have not used any gift tax exemption you can give $5,120,000 away this year without gift tax impact. That number will reduce to slightly over $1,000,000 next year if Congress does nothing. If you have used some of your gift tax exemption, you still have the balance up to $5,120,000 remaining.

Married persons can double the above numbers. 

Opportunity No. 2: Low Interest Loans

You are also aware that interest rates are very low. For example, the IRS approved rate for a loan made in June 2012 for a period of three to nine years is 1.07 percent per annum. The June rate for a loan for a term shorter than three years is 0.23 percent per annum. You can even have all of the interest "balloon" at the end of the term of the loan. This means that for a nine-year loan, your borrower will pay you back nothing until nine years are up and then only the principal and that 1.07 percent per year compounded annually.

What does this mean for your planning?

You can lend to children, grandchildren and others at extremely low rates without IRS problems. A loan like this could finance graduate school education, or purchase of a home or a business. The IRS does not care what the loan is used for.

Of course, these low interest rates make this an ideal time for the use of other planning techniques such as grantor retained annuity trusts ("GRATs") and charitable lead trusts, for the charitably-minded who also want to pass substantial monies on to family members or others.

What will our elected representatives in Washington do to change all this? Who knows? All we know is that these wonderful opportunities may not be here after December 31.

Please contact us as early as possible to avoid the year-end rush.

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