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A Better Partnership


Dec 2004
December 08, 2004

Warner Norcross Recommends Tax Tips to Maximize Year-End Giving

Changes to key federal taxes could change the way traditional year-end gift giving is done over the next five years, according to a partner at Warner Norcross & Judd LLP.

Mark Harder, the partner who leads the Firm's Trusts and Estates Practice Group, notes that increases to the estate exemption in combination with reductions in estate and gift taxes mean that potential givers should be careful to avoid incurring gift taxes in their year-end plans.

"The chances are now better than they've ever been of having a permanent repeal of the estate tax, which means that people should avoid gifting that will require them to pay a gift tax," Harder said. "For years, it has been common wisdom in estate planning that it's better to transfer wealth during one's life and pay a gift tax on that transfer rather than retain the assets and face a higher estate tax rate at the time of death.

"However, the Bush administration began reducing federal tax rates on gifts and estates in 2002 while simultaneously increasing the amount one can pass tax-free to a spouse or child. Those exemption rates will continue to slide up over the next five years for transfers at death. It's possible the estate tax could be repealed entirely during the president's second term - or set so high that only a small percent of estates would be subject to it.

"These factors require you to take a careful look at how you do your giving this year."

For wealthy individuals Harder recommends looking for giving vehicles that have a lower risk of IRS adjustments to the value of the gift. Two of the more popular approaches include:

  • Grantor-retained Annuity Trusts. GRATS allow a giver to transfer assets to a trust and periodically receive a fixed amount for a set period of years. After that time, which is commonly 3-7 years, whatever remains in the trust passes to the next generation. Harder noted that the benefit of a GRAT is that it allows appreciation on assets in excess of an IRS-fixed interest rate to be shifted gift tax-free to children.

  • Charitable Lead Trusts. These work in a manner similar to the GRAT, although the designated charity rather than the creator of the trust receives the periodic payments. At the close of the trust, the remainder passes to the next generation.

Harder noted that $600,000 used to be the maximum that could be transferred tax-free at the time of death. In 2002, the Bush administration and Congress established a schedule that would increase that amount over the next eight years. This year, the amount jumped to $1.5 million and, under the current schedule, will increase to $3.5 million in 2009. The exemptions and tax rates will revert to their 2001 levels if Congress doesn't act before the close of 2010.

"Whatever course the federal government takes on this issue, there is a good chance it may happen in 2005, so we recommend that donors be cautious about what they're doing this year," Harder said. "You don't want to be so aggressive with your estate planning that you are paying unnecessary taxes.

"If the estate tax is repealed, as many think it will be, or if the exemption rises to a level that donors won't be subjected to, they would be better off using strategies that don't incur gift taxes during lifetime."

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About Warner Norcross & Judd:

Warner Norcross & Judd LLP is one of Michigan's leading providers of legal services with more than 170 attorneys in four Michigan offices located in Grand Rapids, Metro Detroit, Holland and Muskegon. For the third consecutive year, Warner Norcross was named the best corporate law firm in West Michigan by Corporate Board Member magazine. Nearly half of the Firm's partners are listed in the 2005 edition of The Best Lawyers in America, a greater percentage than any other large law firm in Michigan. Warner Norcross has been recognized as a national leader in client service among law firms by BTI Consulting, as one of West Michigan's 101 Best & Brightest Companies to Work For and as the best law firm in Grand Rapids by a Grand Rapids Magazine reader survey. The Firm represents local, statewide, regional, national and international clients in all areas of business and civil law.

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