Simon might also consider gifting using a Grantor Retained Annuity Trust (GRAT). This popular estate planning technique, most notably used by the Walton family to transfer Walmart stock, effectively lowers the gift tax value of the transfer to nearly zero, plus it avoids any requirements for a loan pay back. The cumulative effect of all these techniques is Simon's family can avoid gift taxes while he is alive, freeze the value of much of the family business for estate tax when he dies and retain more wealth for the succeeding generations.  

The fact is even with these techniques Simon's estate may still have estate taxes to pay at a 45% top estate tax rate. These taxes can substantially cut into the family's wealth.  Life insurance has of late been recognized by advisors as an attractive sponge to soak up much of the remaining estate tax liability. By holding a guaranteed death benefit insurance contract outside of the estate in a trust, money is available to pay estate taxes without being subjected to estate taxes itself.  

For example, the grantor trust that is holding Simon's gifted stock for his children might also purchase life insurance on Simon's life.  The death benefit would be available to pay off the loan if and when Simon dies, plus it could help pay any remaining estate taxes.  How does the trust afford the premium?  Recall that there is a positive arbitrage between what the trust is earning on the stock (8%) and what it has to pay back to Simon in interest (2.25%). This positive cash flow plus other gifts from Simon generate the money for premium payments. Even if the stock is not particularly liquid, in this low interest rate environment there are both commercial and private lending techniques that can help fund the life insurance purchase.  

As the economy improves, asset values may go up. Improved earnings, better credit availability and more buyers can all lead to enhanced valuations in appraisals. Interest rates, currently at historical lows, seem certain to go up eventually.

Perhaps most pressing of all is the state of future gift and estate tax rules.  There is a general belief in the advisory community that sizeable gift and estate liabilities will remain for wealthy families.  What is not as clear is whether some of the favorable techniques described above will be curtailed or ended by tax legislation.  Particularly in the area of discounting and GRATs, both the administration and Congress have indicated an interest in taking a closer look at these planning opportunities for the wealthy.

Simon and other wealthy individuals may not be happy with the state of the economy and the affect it has had on their wealth. They may have suffered real losses, and be unsure about how to recover lost wealth. However, for those individuals and families seeking to move wealth to future generations, there is a pretty side to this ugly economy.  Now may be the time to move wealth while avoiding gift and estate taxes.      

Steve Parrish, JD, CLU, ChFC, RHU, is a consultant with the Principal Financial Group in Des Moines, Iowa. He can be reached at 515-235-6120.


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