Is this a good time to transfer your wealth to your children?

By Denice A. Gierach

With the interest rates at a really low rate, and with the economic fallout from the present economy, even people with money do not feel flush now and may decide that they do not want to make gifts to the next generation.  Even though the economy has been in recession many times before and has come out of it to prosperity, sometimes it is hard to look beyond the present time to see that prosperity.

However, this is really a good time to consider making gifts.  In a low interest rate environment, there are many tools allowed by the Internal Revenue Code, which allow a person to give more than they would in a higher interest rate environment.  These tools are given various names by estate planners such as SCINs, GRATs, CLAT’s and IDGT’s.  Since the value of the gift is based upon interest rate tables shown by the IRS referred to as the” applicable federal rates”  and those rates are low, the low interest rates enable you to transfer more of your wealth tax free.

If you think that your children will need to borrow money (and they are a good credit risk), consider acting as their banker.  While you must have a note and proper collateral, just like the bank, using the IRS tables published in October, you can make a nine year fixed rate loan to your child for a rate as low as 2.63%, which your child will not be able to match in the open market.  Then you can collect the interest on the note for at least one year and forgive up to $13,000 ($26,000 if your child is married) of your child’s obligation each year, without incurring current gift taxes and also decreasing your potential future estate tax liability.

There are other more complex techniques where the low interest rates also help to minimize your future federal estate taxes and are most helpful to those persons with a higher amount of wealth.  One concept mentioned above is a SCIN, which is a self-cancelling note.  Using this technique, you sell an asset to a family member.  You, as the seller, agree to finance the sale and you provide the buyer with a note payable to you which stipulates that the unpaid balance will be cancelled when you die.

Another technique, the GRAT, is called a grantor retained annuity trust, allows you to transfer future appreciation on assets that you think may appreciate in the future to your children or other heirs.  Assuming that you live longer than the term of the trust, which may be two or three years, the balance in the trust will go to your heirs tax free of either gift or estate tax.  However, you if fail to survive the term of the trust, the amount reverts to your estate and may be taxable upon your death.

There is another technique referred to as a CLAT, a charitable lead annuity trust, which is a longer term strategy than a GRAT.  While a GRAT will revert to your estate if you fail to survive its term, a CLAT will not.  In a CLAT, property is placed in trust for a period of years during which a fixed amount is paid to a charity each year, with the remainder of the trust at the end of the term passing to non-charitable beneficiaries.  Using the CLAT, you may receive a large charitable deduction in the first year the trust is set up for the gift portion to the charity, but in that event, you are taxable from an income tax standpoint on the income that is being paid to the charity.

A technique that moves the assets out of your estate immediately and is not dependent upon your survival is a sale to an IDGT, an intentionally defective grantor trust.  This trust is perfectly legal and is not actually defective.  Using this estate freeze technique fixes the value of the asset that will be includible in your estate.
As you may be able to tell from this article, there are a number of perfectly legal techniques in which you are able to give more to your heirs due to the low interest rate.  Since these are more complex techniques, it is wise to use a trust attorney who specializes in this area to assist you in making these types of gifts.