There are many different strategies available for minimizing exposure to transfer or gift taxes. One such strategy is very helpful if you possess highly appreciable assets. If you transfer appreciable assets, name a beneficiary to assume ownership of any remaining assets, once the term of the trust ends, you can save substantially on gift taxes.
The history of estate and gift taxes
Long ago, the government established the federal estate tax, which imposed a special tax on the estate of every individual upon their death. The amount of the estate tax is calculated as a percentage of the value of the total estate. The obvious response to the estate was the giving of gifts throughout your lifetime, so as to reduce the amount of the estate and the tax that was imposed. Not pleased with this method of tax avoidance, legislators then enacted the gift tax. Then, in the 1970s, the two taxes were unified, as they remain today.
Estate and gift tax exclusion amount
As of 2015, there is a $5.43 million exclusion. This means that you are allowed to transfer up to that amount before the unified estate/gift tax would be imposed. In other words, only the portion of your estate that exceeds $5.43 million would be subject to the gift/estate tax, which is currently 40 percent.
How the taxable value is determined
Since there will be a beneficiary ultimately assuming ownership of any remainder from the trust, the IRS determines the taxable value of the trust by adding the hurdle rate (that is the minimum rate that is expected to be earned when investing) to account for anticipated interest accrual. This is equal to 120 percent of the federal midterm rate. As the grantor, you would receive annuity payments throughout the term of the trust term. The idea is to zero out the GRAT (grantor retained annuity trust) by accepting annuity payments equal to the entire taxable value of the trust.
The role of asset appreciation
Most assets will not necessarily appreciate at exactly the same rate that the Internal Revenue Service applies. If the assets appreciate at a rate that exceeds the hurdle rate, there will be a remainder left in the trust after the term of the trust has expired. Because the beneficiary inherits the remainder, there would be no gift tax consequences. The benefits of using this strategy are many.
Always consider strategies for preserving wealth
For families with high net worth, the 40 percent federal gift/estate tax rate makes it highly necessary for families to take all necessary steps to preserve the wealth they have attained. This is where comprehensive estate planning techniques become important. Your estate planning attorney can provide you with the best advice for transferring appreciable assets, in order to preserve as much of your estate as possible.
If you have questions regarding gift taxes, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696.
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