A favorite instrument for estate planning in the current low-interest rate environment, the grantor retained annuity trust (GRAT), is under the Congressional microscope. A GRAT allows the parent, as grantor, to receive an income stream based on the asset value plus a variable interest rate, while if the trust earns money above the interest rate-easy these days-the heirs get the remaining assets tax-free when the trust's term expires. GRATs are a gamble, however: If the grantor dies before the trust's term expires, the entire asset goes back into the estate. For that reason the most popular GRATs have been set up for a short term, usually two to three years. But in March the House passed a bill (H.R. 4849) that would, among other restrictions, require a term of at least ten years, greatly increasing the odds of the grantor dying.
In light of the potential GRAT limits, estate planners might move more of their clients' assets into intentionally defective grantor trusts (DGTs), which remain out of the estate no matter when the grantor dies.
In the years ahead, planners will have to be more circumspect with grantor trusts and other vehicles that allow the grantor, for gift tax purposes, to discount the fair market value of the shares based on the fact that they are being taken out of the market and becoming the property of a family member with no control over the business, estate planning attorneys say. Congress is also addressing perceived estate and gift tax abuses by calling for limits on valuation discounts when a business owner transfers shares to family members.
"Case law says there has to be a business purpose for transferring the shares, so estate lawyers will be trying to get rid of family limited partnerships or LLCs created for the sole purpose of getting the discount," says Burns. With valuations and interest rates close to rock bottom, her firm is putting together many minority interest sales, even those with a clear business purpose. "And if a patriarch or matriarch has stepped down but still owns a controlling interest in a family-owned business or partnership, they should sell right now," she says. "If they die owning a controlling interest, there won't be a discount. And if their concern is getting income from the business entity, they can sell the stake on a promissory note."
Longevity In A Tough Economy
The sad case of Anthony Marshall is a reminder that outside creditors aren't the only people who might try to pounce on an estate. Marshall was 85 last year when a New York State Supreme Court jury pronounced him guilty of stealing millions from the estate of his mother, the socialite and philanthropist Brooke Astor, who died in 2007 at the age of 105. The case, now dragging through the appeal process, began in 2006 when Marshall's son Philip, then 53, filed a petition accusing him of keeping his mother-Philip's grandmother-virtually imprisoned in her Park Avenue home. As Rubenstein sees it, family members are likely to be more litigious in the future as parents, children and grandchildren expect to live into their 80s, 90s and 100s, with their financial needs growing as they age.
"The traditional plan in which the next generation gets their inheritance when the parents die would mean that today the kids might not get the money until they're 70 or older, and by then they'll be less interested in growing the family's wealth," says Rubenstein. "On the other hand, the parents might need to hang on to the money while they're alive for their own health care."
James Moniz, president and CEO of Northeast Wealth Management in Braintree, Mass., worries about the children of the wealthy at a time when even the best education does not guarantee earning power. "With this economy, it's going to take the young generation longer to build their own wealth," he says.
Burns says she is seeing the effects of the economic downturn in more requests for wills with flexible terms. "You pair a dollar amount with a percentage, so that you don't end up giving more to charity than to your kids," she says. "For example, you say each of my children gets $5 million or no less than one-third of the entire estate."
Tortorich likes the idea of gifting for longevity planning purposes. "People are giving some money to their kids to test the way they're going to use it over a long life expectancy," he says. If the parents find they have a spendthrift, an overly cautious hoarder, a speculator, or a combination within their offspring, they can help their kids work on that financial behavior.
In 2010, many estate attorneys were advising clients to sit down with a wealth manager to draw up a scenario projecting how much money they will need if they live into their 90s or even 100s, with all of the medical bills that typically accompany old age, then earmark some of the remains for gifting, assuming the gift tax rate itself remains a gift from Congress.