by Hilary C. Pierce, Esq. Estate Planning Partner

It is no secret that the global economy is suffering. Assets values have declined dramatically and interest rates are at record lows. Although one's investment portfolio has likely suffered, the declining value of one's assets and the low interest rates offer some very interesting estate planning opportunities for those desiring to transfer wealth to future generations. Some of these planning opportunities are discussed below.

I. Outright Gifting

In 2009, the amount for annual exclusion gifts (the amount one can give annually with no gift tax ramifications) increased to $13,000. One should consider making annual exclusion gifts while assets values are low. With greater potential upside, one may get more "bang for your buck" when making annual exclusion gifts.

Under the current tax law, one can gift $1,000,000 during his or her life with no gift tax ramifications (commonly referred to as the gift tax exemption amount). Making gifts of one's gift tax exemption amount while asset values are depressed (assuming an eventual rebound in values) translates into passing more assets to future generations.

II. Grantor Retained Annuity Trust (GRATs)

Given the low interest rates and rumblings from Washington regarding possible additional requirements for GRATs that could eliminate some of the appeal of these trusts, Grantor Retained Annuity Trusts (GRATs) are currently a particularly appealing technique.

A GRAT is a trust in which a donor retains the right to receive an annuity payment from the trust for a term of years (the GRAT "term") after which the trust property passes to the designated remainder beneficiary. Depending on the annuity payout chosen, the present value of the gift to the remainder beneficiary can be minimal because the GRAT can be drafted so that the annuity payouts (which include an expected rate of return set by the IRS) equal the amount initially contributed to the GRAT (commonly referred to as a "zeroed-out" GRAT). Thus, any future appreciation in excess of the IRS's expected rate of return passes to the remainder beneficiary with little or no gift tax consequences.

Given the upside potential in many currently undervalued assets, many individuals are creating several GRATs simultaneously, each one holding an individual stock or a certain asset class of a diversified portfolio. For example, an individual may choose to create two GRATs at the same time - one holding growth stocks and the other holding stocks in international companies. If one asset class appreciates in value over the GRAT term and the other does not, one GRAT will succeed and the other will fail. By using a separate GRAT for each asset class instead of one GRAT for all assets, one is able to reap the benefits of the asset class where appreciation has occurred without that appreciation being diluted by declines in other classes.

In addition to funding GRATs with particular asset classes, many individuals choose to fund GRATs with a large concentrated stock position.

Although the currently record low interest rates are certainly helpful to the success of a GRAT, appreciation in asset values is a much greater factor in determining the success or failure of a GRAT due to the typical short terms of the GRATs we frequently recommend.

III. Selling and Loaning Assets

Individuals with investment portfolios, commercial properties, or operating businesses may wish to consider a current gift or sale of these assets at this time for the following reasons. First, as a result of the poor economic conditions, asset values are low allowing for possible greater upside potential when these assets are gifted or sold to others.

Second, in the context of intra-family transactions involving loans, the minimum interest rates for February 2009 are at historic lows. For example, the interest rate for a three year note with interest payable annually is 0.60%. A similar loan with a term in excess of 3 years but not more than 9 years is 1.65%.

Using the February 2009 rates, if an individual with a $1,000,000 portfolio of cash or cash equivalents generating a return of 4.5% were to lend these assets to his or her children for 3 years, the children would pay the interest due but, at the end of the term of the note, would retain the spread between the interest, dividends and/or principal earned on the investments (4.5%) and the interest on the loan. Over three years, this would amount to over $117,000.

IV. 2009 Direct IRA Charitable Rollovers

The Emergency Economic Stabilization Act of 2008 has revived a valuable opportunity for individuals who have reached age 70½ to transfer funds directly from their regular IRAs to charities. In the right circumstance, using this vehicle to make a charitable gift can save significant income taxes and benefit charity at the same time. The direct charitable IRA rollover may be used by appropriate individuals when certain conditions are met some of which include making gifts directly from the IRA to a public charity or donor-advised fund and provided the total gifts from an individuals IRAs does not exceed $100,000 in 2009.

This method of making charitable gifts from IRAs may eliminate state income taxes that might otherwise be payable when IRA distributions are made to the IRA owner and then are donated to charity. It can also preserve other tax benefits for the IRA owner, such as medical deductions or miscellaneous itemized deductions that might otherwise be lost if the IRA owner were to receive an IRA distribution directly and then contribute the distributed funds to charity. The direct charitable IRA rollover can be used to satisfy the annual required minimum distribution requirement for the IRA owner up to the $100,000 annual limit.

If you have any questions about any of the techniques discussed above, please contact Hilary Pierce, Ellen Kahn or Jean Ryan at Sideman & Bancroft.

This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.

Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.