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For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year end to save taxes.
Congress’s decision not to include a proposed minimum term for grantor retained annuity trusts (GRATs) in the tax legislation passed back in January — combined with low interest rates — may make it an ideal time to add short-term GRATs to your estate planning arsenal.
A GRAT consists of an annuity interest, retained by you, and a remainder interest that passes to your beneficiaries at the end of the trust term. The remainder interest’s value for gift tax purposes is calculated using an IRS-prescribed growth rate. If the GRAT outperforms that rate — which is easier to do in a low-interest-rate environment — the GRAT can transfer substantial wealth gift-tax-free.
If you die during the trust term, however, the assets will be included in your taxable estate. By using a series of short-term GRATs (two years, for example), you can capture the upside of market volatility but minimize mortality risk.
If short-term GRATs might be right for you (consult us for more information), consider deploying them soon in case lawmakers revive proposals that would reduce or eliminate their benefits.
With commencement ceremonies for high school seniors coming up, many parents and grandparents are contemplating making cash gifts the student can use for college expenses. But if gift and estate taxes are a concern, consider a potentially more tax-efficient gift: paying some of the child’s college tuition.
Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.25 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.25 million GST tax exemption.
But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers. If you’d like to learn more about tax-smart ways to fund education expenses or make gifts to reduce your taxable estate, please contact us.
Exemption portability, made permanent by the American Taxpayer Relief Act of 2012, provides significant estate planning flexibility to married couples if sufficient planning hasn’t been done before the first spouse’s death. How does it work? If one spouse dies and part (or all) of his or her estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.
But making lifetime asset transfers and setting up trusts can provide benefits that exemption portability doesn’t offer. For example, portability doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does. Also, the portability provision doesn’t apply to the GST tax exemption, and some states don’t recognize exemption portability.
Have questions about the best estate planning strategies for your situation? Contact us — we’d be pleased to help.
