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Wealth Transfer Opportunities in the Current Economic Environment

November 2008
People: Mark D. Balk, J. Robert Casey, Deborah S. Kay, Suma V. Nair, Michelle M. Porter, Andrew D. Rothstein, Nancy B. Samiljan, Kerry L. Spindler, Richard W. Talkov*

In recent months, we have seen significant instability in the financial markets, resulting in historic declines in the value of virtually all asset classes including stocks, bonds, real estate and other business interests. Among the government’s responses to the current economic conditions has been the lowering of key interest rates. This combination of low asset values and low interest rates presents a unique opportunity to utilize many simple gift transfer techniques to achieve superior wealth transfer planning results.

Opportunities Presented by Assets With Depressed Values

It is an opportune time to consider transferring shares of stock while the value of the shares is at an historic low. For example, if as a result of the current market decline you can give your child 50% more shares of stock utilizing your $12,000 annual exclusion, then if the shares recover value you will have accomplished a substantially greater transfer of appreciation to your children.

A gift of cash achieves similar results where the recipient uses the cash to buy assets that are priced lower now than they have been in the past and those assets appreciate in the future.

A simple way to seize this opportunity is to make a taxfree transfer of assets or cash in an amount not exceeding the gift tax annual exclusion ($12,000 per recipient in 2008 and $13,000 per recipient in 2009). If the gift is made by a married couple, then twice this amount may be given to the recipient. Moreover, if the couple makes annual exclusion gifts before the end of 2008 and again in early 2009, in the coming months they may give a combined total of up to $50,000 per recipient. Gifts to a number of recipients may allow for the transfer of a significant amount of wealth.

Additionally, by using a trust to receive these gifts, it is possible to aggregate the transfers to a number of recipients so that the assets can be managed together.

The opportunity to transfer assets free of gift tax at currently low values is not limited to the annual exclusion amount. A donor may also consider transferring assets using some or all of his or her cumulative $1,000,000 ($2,000,000 for a married couple) lifetime gift tax exemption.

Closely-held business interests that have declined in value provide another gift transfer opportunity. The value of these interests may be further discounted for lack of control and marketability depending upon the nature of the business holdings. In this environment, a greater share of the business interests can be transferred with less gift tax cost. Furthermore, under some circumstances, a transfer giving rise to the payment of gift tax could be warranted since the lower value will minimize the gift tax that the donor would otherwise incur if the same asset were transferred when asset values increase.

Year-End Giving Considerations

Timing of gifts to charitable recipients: A check payable to a charity dated and postmarked on or before December 31,
2008 will be deductible in 2008. Timing of gifts to non-charitable recipients: A check must be delivered and cashed by a non-charitable recipient on or before December 31, 2008 for it to be effective as a gift in 2008.

Opportunities Presented by Low Interest Rates

The lowering of interest rates on U.S. Treasury obligations has had the effect of reducing the minimum interest rate that the IRS requires to be charged on loans between related parties in order to avoid adverse gift and income tax consequences. Today’s historically low interest rates for related party loans create another significant wealth transfer opportunity.

For example, the annual interest rate that must be charged on a related party loan made in November, 2008 ranges from 1.63% to 4.24%, depending upon the duration of the loan. These rates are substantially lower than the annual rates charged on conventional mortgages, which are now in the range of 6.5%.

A simple way to take advantage of current low interest rates is to loan cash to a child so that he or she may purchase a home or assets that now have a low value, but that have the potential to appreciate at a rate greater than the interest rate charged on the loan. Another way to take advantage of the low interest rates is to refinance a higher interest rate mortgage to reduce a child’s monthly expenses. However, parties to these loans must pay attention to the structure of the loan and comply with the payment provisions to avoid adverse tax consequences.

There are a number of other wealth transfer techniques that are highly effective when interest rates are low. These techniques involve either a gift transfer or a sale of an asset with the goal of shifting future appreciation to the next generation. One technique requires that the initial value of the asset be returned to the transferor over some period of time, thus reducing to zero the value of the gift. An asset with a historically low value is a strong candidate for these techniques if it is expected that the asset will appreciate or produce earnings at a rate in excess of the IRS’s prescribed interest rate (3.6% in November) since that excess performance will pass taxfree to the next generation. These techniques are particularly successful in the transfer of interests in family businesses, income producing real estate, and marketable securities.

Charitable Giving

If a donor is charitably inclined, low interest rates and low asset values make possible the creation of a trust that jointly benefits charity and the donor’s family at low gift tax cost. If you are considering making a charitable gift, now is a good time to explore this opportunity.

Gifts to Charity From Your IRA

Under recently extended tax provisions, until December 31, 2009, taxpayers who have reached age 70½ may direct distributions of up to $100,000 per year directly from an IRA to certain public charities without adverse federal income tax consequences.


No one can predict how long the current climate of low asset valuation and low interest rates will continue. In addition, when the new administration in Washington reviews current tax laws, we believe there exists the potential for changes that could affect wealth transfer planning. For these reasons, now is an opportune time to engage in wealth transfer planning.

Tax Changes and Inflation Adjustments for 2009

  • Annual Gift Tax Exclusion $13,000
  • Estate Tax Exemption $3,500,000
  • Lifetime Gift Tax Exemption $1,000,000
  • Lifetime Generation-Skipping Tax Exemption $3,500,000

For questions about the information contained in this alert, please contact any member of the Private Client
and Trust Group below.

Mark D. Balk

J. Robert Casey

Deborah S. Kay

Suma V. Nair

Michelle M. Porter

Andrew D. Rothstein

Nancy B. Samiljan

Thomas G. Sitzmann

Marvin Sparrow

Kerry L. Spindler*

Richard W. Talkov†

*Admission pending

†Mr. Talkov is an accountant and not an attorney

This client advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, to the extent this communication (including any attachments) contains any federal tax advice, it is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2008 Goulston & Storrs – A Professional Corporation All Rights Reserved

* Not an attorney
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