Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

One year ago, I wrote about interest rates reaching an all-time low. They dipped a little more late last year, then increased before heading lower again. Now, they have reached another all-time low.

The 7520 Rate for transactions in October of 2011 will be 1.4%. This represents a 30% decrease from the September rate of 2%.  

Grantor retained annuity trusts (“GRATS”) and charitable lead annuity trusts (“CLATS”) work well when the Section 7520 Rate is low. Installment sales to grantor trusts and intra-family loans also work well when interest rates are low. These transactions use different interest rates than the 7520 Rate, but these rates are also near the all-time low.

One of my clients is currently evaluating a sale to a grantor trust in exchange for a private annuity. Private annuities work better in a low interest rate environment. I seldom recommend private annuities because they work best in terms of reducing estate taxes when my client dies sooner. This particular client is not expected to live beyond 3 years, though he has at least a 50% chance of living at least one year. This 50% threshold is required in order to use the IRS actuarial tables.

The low interest rate environment is not good for charitable remainder annuity trusts (“CRATS”) and qualified personal residence trusts (“QPRTS”). Even though low interest rates are not favorable for QPRTS, some of my clients are establishing QPRTs to take advantage of the current low values of residential real estate. One of my clients will be establishing two QPRTs for her Florida vacation home before the end of September in order to take advantage of the higher rates.

You should consider acting now to take advantage of the opportunities presented by the record low IRS interest rates and the $5 million federal gift tax exemption that is in effect for 2011 and 2012. 

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Everyone’s lifetime gift tax exemption increased significantly this year. Several of our clients who plan to take advantage of this opportunity have already made their $5 million gift.

Other clients are taking their time and considering their options before making their gift. Some have given $440,000 and plan to give the rest in 2012. The reason for a gift of $440,000 is because this is the amount above which the rate of Tennessee gift taxes increases from 7.5% to 9.5%. If you are planning to give more than $440,000, you should consider splitting the gift between 2011 and 2012 in order to minimize Tennessee gift taxes.

One of our clients has become concerned about the political rhetoric regarding a potential repeal of the Bush-era tax cuts for millionaires. To my knowledge, this rhetoric has not been specifically directed to the $5 million gift tax exemption. However, President Obama’s plan to reduce our deficit proposes a return of the estate tax exemption to 2009 levels in 2013. In 2009, the gift tax exemption was only $1 million.

If the President’s plan gains traction, it could be passed with an earlier effective date. There is some possibility, albeit remote, that the $5 million gift tax exemption will not stay in place until December 31, 2012.

Our client had planned to make a gift of $440,000 in 2011 and $4,680,000 in 2012. You will notice that the two gifts add up to $5,120,000. There is a CPI inflator on the $5 million gift tax exemption for 2012. The official number will be announced later this year; however, based upon inflation that has occurred to date, the exemption has been estimated to rise to $5,120,000 for 2012.

Our client has decided to reverse the gifts and make a gift of $4,680,000 in October of 2011 and $440,000 on January 1, 2012. Our client will still get the benefit of running up the Tennessee gift tax rate brackets twice. Our client is taking the risk that any change to the gift tax exemption that occurs during 2012 will not be made retroactive.

The one negative from accelerating the majority of the gift tax to 2011 is that our client will be required to pay the majority of the Tennessee gift tax on April 15, 2012, rather than April 15, 2013. Accelerating the payment of approximately $430,000 in gift taxes by one year will cost the interest that could have earned between April 15, 2012 and April 15, 2013. Since interest rates being paid on fixed-income investments are so low right now, our client has decided that accelerating the payment of the Tennessee gift tax is cheap insurance against a potential law change.

If you know that you want to make a $5 million gift prior to December 31, 2012, you should consider accelerating a substantial portion of the gift to 2011. In addition to hedging against a potential adverse law change, accelerating the gift could have other benefits. If you choose to make a gift of an asset with depressed values, such as real estate or stock, the asset might appreciate in value, which would enhance the value of the gift.

Other benefits from accelerating the gift include income from the property as well as your payment of income taxes on the income. Once you make the gift, income from the gift will belong to your donee. Almost all of our clients who are making large gifts are making the gifts to a grantor trust. This means that the donor will continue to pay income tax on the income from the gift even though they will not receive the income. Paying income tax on income that you do not receive further reduces your taxable estate.

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Estates of decedents who died in 2010 were given a very valuable option. They can elect to not be subject to estate taxes and have carryover basis for income tax purposes. Alternatively, they can elect to be subject to estate taxes yet receive a stepped-up basis for the assets owned by the decedent.

Those who choose to be subject to the estate tax system are required to file a Form 706 by September 19, 2011 if the estate is larger than $5 million. The IRS has just announced that these estates may obtain a six-month extension of the time to file to March 19, 2012 by requesting an extension on Form 4768.

Those who choose to be in the carryover basis system will be required to file a Form 8939. Originally, the IRS said that Form 8939 would be due on November 15, 2011. That deadline has been extended until January 17, 2012.

One of the reasons the IRS extended these dates is because of their delay in providing the appropriate forms. We only recently received the Form 706 and the accompanying instructions. We have yet to receive Form 8939.

All of the estates with whom we are working know which system they plan to elect. All of the estates under $5 million are electing the estate tax system so that they can have stepped-up basis for income tax purposes without having to file Form 8939. These estates do not have to file any forms to make this election. Only 1 of the estates that were above $5 million are choosing the estate tax system. The rest are choosing the carryover basis system. The 2 month extension until January 17, 2011 is very welcome news for these estates, especially since we have yet to see the Form 8939.
 
If you are uncertain of the best tax system, you should file the Form 4768 no later than September 19, 2011. This will buy you 4 months of time to make the decision. You will not be precluded from electing the carryover basis system if you file the Form 4768.

If you file Form 4768, you should also request an extension of time for payment of any estate taxes that would be owed. If you eventually file a Form 706 and owe taxes, the extension of time to pay will cause you to owe interest during the interim. However, late payment penalties will be avoided, and the interest rate is very low.
 

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