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A Better Partnership


Jul 2008
July 17, 2008

These Planning Techniques Take Advantage of a Poor Economy

There are some positives coming out of this stagnant economy. Current market conditions and low interest rates have created a window of opportunity to implement leveraged transfers that shift substantial amounts of growth and appreciation while paying little or no gift taxes.

There are two types of trusts that are particularly appropriate to use right now when transferring assets to your beneficiaries that are expected to appreciate significantly in the future. Grantor Retained Annuity Trusts (GRATs) and sales to Intentionally Defective Irrevocable Trusts (IDITS) essentially freeze the value and return of the transferred assets at today's prices and yields.

In a down economy such as this one, that's a big deal.

Why? Because the result is that the appreciation and increased yields in the future accrue to the benefit of your beneficiaries and allow you to avoid or reduce gift taxes now and estate taxation later on the assets that are transferred.

A GRAT is a trust created by a grantor that provides the grantor with an annuity for a period of years, and then passes the remainder to the beneficiaries named in the trust. Gift tax is payable on the present value of the remainder interest, which is the value of the property transferred to the trust less the value of the retained annuity. Because the present value depends on the interest rate, current lower interest rates increase the value of the annuity and therefore reduce the value of the remainder interest.

The grantor receives a stream of payments from the trust for a specific period for a term of years selected by the grantor. After that period ends, any remaining assets are left to the trust's beneficiaries, which then can be distributed immediately to the beneficiaries or remain in trust. The amount of remaining assets depends on the performance of the assets that fund the trust. Accordingly, the best assets to transfer to a GRAT are those you reasonably expect to appreciate at a higher rate than the current interest rates. These assets may include stocks, real estate or interests in a closely held business.

Sales to IDITs provide benefits similar to those of a GRAT. After the grantor creates an IDIT, he or she sells assets to the trust in exchange for an interest-bearing installment note from the trust.

In this scenario, the grantor does not recognize a gain or loss on the sale and is not required to pay tax on the interest payments received on the note. After the sale, any appreciation on the assets sold to the IDIT in excess of the amount of interest payments on the note will remain in the trust, ultimately to be distributed to the trust beneficiaries without incurring gift taxes. Accordingly, like a GRAT, a sale to an IDIT should use assets that are likely to appreciate significantly during the term of the note.

The current state of the market and interest rates has created exceptional planning opportunities for those with assets that will appreciate significantly in the future and who are willing to transfer those assets now. In those cases, GRATs and sales to IDITs are two planning options that should not be overlooked. Contact your Warner Norcross & Judd attorney for more information or for help in taking advantage of these timely options.

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