Low interest rates and depressed asset values create a unique opportunity to transfer property in a manner which removes future appreciation from an estate with minimal or potentially no gift tax cost and with possible income tax benefits.
Part I of this First Alert discussed two estate planning strategies to take advantage of the current economic situation, Grantor Retained Annuity Trusts (“GRATs”) and Sale to an Intentionally Defective Grantor Trust (“IDGT”). This Part II addresses the following additional estate planning opportunities:
Charitable Remainder Trusts (“CRTs”)
CRTs are often used to defer income tax on the sale of property (marketable securities and closely held business interests) that is expected to significantly appreciate. A CRT is established when an owner transfers property to an irrevocable trust, while retaining an annuity interest for a specified
term. At the end of the term, one or more qualified charities designated in the trust instrument receives the property remaining in the CRT, including the income and appreciation exceeding the annuity payments. This transaction qualifies for income and gift tax charitable deductions and removes appreciated property from the owner’s taxable estate with minimal or no tax liability and may have potential income tax benefits.
Charitable Lead Trusts (“CLTs”)
Under a CLT, the charities designated in the instrument, rather than the owner, receive annuity payments for a specified term. All of the property remaining at the end of the term is then distributed to remainder
beneficiaries (usually the owner’s family members), including the income and appreciation exceeding the annuity payments. This transaction allows the owner to receive an immediate income tax deduction during the first year of the trust and is beneficial for an owner who is expected to report a large amount of income due to the sale of appreciated property.¹
With Applicable Federal Rates² at an historic low, intrafamily loans are a simple way to transfer wealth out of a taxable estate to a family member without using the transferor’s lifetime gift or GST tax exemption. For instance, a parent may loan money to a child at a low interest rate for the purchase
of a home or starting a business. These loans are structured with the intention of repayment, at a minimum rate of interest set by the IRS, and must be formalized, in writing, with a payment schedule.
¹Under the CARES Act, an individual can deduct cash contributions to a qualified charity in 2020 up to 100% of such individual’s adjusted grossed income.
²The AFRs for May 2020 are as follows: Short-term Annual AFR is 0.25%, Mid-term Annual AFR is 0.58% and Long-term Annual AFR is 1.15%.
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