Transfer Appreciable Assets at a Gift Tax Discount

Transfer Appreciable Assets at a Gift Tax Discount The federal estate tax was established back in 1916. What would you do if you knew that your estate was going to be subject to the estate tax? A logical person would consider lifetime gift giving, and this is exactly what wealthy people did after the estate tax was enacted.

Tax minded legislators were not too pleased with this strategy, so they enacted a gift tax in 1924 to prevent people from giving gifts to avoid the estate tax. The other side of the argument prevailed when the tax was repealed in 1926, but it was reenacted in 1932, and it has been in place since then. During the 1970s, the estate tax and the gift tax were unified.

There is a $5.43 million exclusion at the time of this writing in 2015. The credit or exclusion is the amount that you can transfer before the tax would be applicable. Only the portion of your estate that exceeds $5.43 million would be subject to the gift/estate tax and its 40 percent rate.

If you are exposed to transfer taxes, there are strategies that can be implemented to ease the burden. One solution is the zeroed out GRAT strategy.

This strategy can be effective if you are in possession of highly appreciable assets. The way that it works is you fund the trust with these appreciable assets, and you name a beneficiary who would assume ownership of any remainder that may exist after the expiration of the trust term.

Because a beneficiary may be assuming ownership of a remainder, the IRS determines the taxable value of the trust by adding the hurdle rate to account for anticipated interest accrual. This is equal to 120 percent of the federal midterm rate.

You as the grantor will receive annuity payments throughout the duration of the trust term. The idea is to zero out the grantor retained annuity trust by accepting annuity payments that are equal to the entire taxable value of the trust.

Assets are not necessarily going to appreciate at the exact rate that the Internal Revenue Service applied, and federal interest rates have been quite low for a number of years. If the assets appreciate at a rate that exceeds the hurdle rate, there will be a remainder left in the trust after the expiration of the term. The beneficiary would inherit that remainder, and there would be no gift tax consequences.

Explore Wealth Preservation Strategies

There are many high net worth families here the greater Dallas area. Given the 40 percent rate of the federal gift/estate tax, you have to take steps to preserve your wealth when you are planning your estate.

If you are ready to get started, our firm can help. We offer free consultations, and you can send us a message through the following page to set up an appointment: Dallas TX Estate Planning Attorneys.

To learn more, please download our free what are the gift tax exclusions here.