Thursday, May 14, 2009

High End Estate Tax Savings Strategies Being Eyed by White House

A recent Wall Street Journal article, Estate-Tax Strategies Could Survive Curbs, reports that the Obama administration is proposing to curtail the use of two estate planning techniques typically employed by high net worth individuals.  The two techniques are the grantor retained annuity trust (GRAT) and the family limited partnership (FLP).

A GRAT is an irrevocable trust in which the grantor retains the right to receive an annuity for a term of years with the balance at the end going to designated beneficiaries.  If the grantor survives the term, neither the assets nor any appreciation is included in the grantor’s taxable estate.  On the other hand, if the grantor dies before the end of the annuity term, all of the assets are included in the grantor’s gross estate at the fair market value as of date of death.  Since the technique only works if the grantor survives, some GRATs contain short annuity terms.  The White House is proposing the imposition of a minimum 10 year annuity term.  Even if that were to happen, wealthy individuals would no doubt continue to look at the GRAT as an option, because their estate would be no worse off even if they fail to survive the term.  Nonetheless, a minimum 10 year term would certainly dissuade the very elderly from using this technique.

The FLP is sometimes used to transfer family wealth from one generation to the next at a discounted value.  Valuation discounts usually exist because of lack of control and marketability.  The FLP has been under attack by the IRS for years.  The WSJ article indicates that the Obama administration does not like the situations where discounts are based upon restrictions that the family has the ability and intention to later remove.

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