The Bright Side of the Economy

The economic situation is adversely affecting a lot of people. However, there may be a bright side in the area of transfer tax planning. The federal estate and gift taxes are meant to tax the transfer of wealth from one generation to the next. The tax is based on the value of one's assets. As many of our assets (homes, stocks, properties) are at historically low values, this environment can be a perfect opportunity to transfer wealth at a low tax cost.

Now I am not telling anyone to die, but rather to consider making lifetime gifts of assets. Each individual can pass up to $13,000 to another individual without gift tax consequences (spouses can split a gift and give up to $26,000). In this environment, you can gift more shares of stock using the $13,000 umbrella than you could have three or four years ago. If the shares increase in value after the gift, then that appreciation will be out of the donor's taxable estate and will be included in the estate of the recipient.

Another aspect of this current environment is historically low interest rates. These interest rates can be important for certain wealth transfer vehicles (such as a Grantor Retained Annuity Trust or GRAT), but also for some simple transactions, such as intra-family loans. A family member loaning money to another may not want to charge an interest rate. However, the IRS has established a minimum rate that must be charged in order to avoid having the failure to charge interest treated as a gift. These minimum rates are currently low and therefore it may be an excellent time to explore these options.

As always, these words are not meant to apply to anyone's specific situation. If you have any questions or concerns, please consult your legal or tax advisor.