As We See It

GRATs / Family Discounts - “Last Call?”

As we go to press, the unfavorable economy and depressed values make 2009 an ideal time for those with significant estates to update their estate plans. Three basic factors make prompt (make that urgent) action on estate planning advisable:

  1. Asset values are depressed, reducing the gift tax bite from transfer of ownership (and future appreciation) to the next generation.
  2. Interest rates are at or near all time lows, making various sophisticated estate planning techniques discussed below more attractive.
  3. Proposed legislation may curtail the ability to apply marketability and minority discounts to family investment entities, diminishing the benefits of one of the “work horses” in estate planning - the grantor retained annuity trust or GRAT.

The IRS-mandated interest rate applied to interfamily transactions for gift tax purposes is at or near an all-time low. The January 2009 interest rate applicable to interfamily loans with terms of three to nine years was 2.06 percent and went down to 1.65 percent in February 2009. Families can use these rates to make loans to younger family members to finance the purchase of assets such as a house or investment property. The so-called Sec. 7520 rate, used to establish the “hurdle” for GRATs, is only 2 percent in February 2009. The benefits of sophisticated estate planning depend on an asset generating returns greater than the IRS-mandated interest rate or the Sec. 7520 hurdle rate. Accordingly, if asset values are depressed at the time of the gift, those assets may significantly outperform those interest rates over two years, a common term for a GRAT, or even longer.

Finally, a significant tool in estate planning is the availability of discounts for the

These discounts typically range
from 25 percent
to 40 percent.
transfer of a minority or non-controlling interest in a non-marketable family investment entity. These discounts typically range from 25 percent to 40 percent. The ability to sell or otherwise transfer a discounted position in a family investment entity pursuant to very low interest rates make the current climate an opportune time for wealth transfer transactions. However, new legislation has been introduced that could eliminate the ability to claim these discounts. Furthermore, there is conjecture that legislation may be proposed to mandate a minimum 10 percentage gift for GRAT transactions (current GRATS can be established with no gift tax consequences at all). Either of these potential changes to the regulatory environment could have a chilling effect on the use of GRATs. As we see it, for all of these reasons, we suggest that individuals with significant estates discuss their estate plans with a WTAS family wealth planning professional immediately and consider implementing a GRAT or other interfamily transaction.