| Since the estate tax repeal come in effect on | | | | IRS has become increasingly hostile to such |
| January 1, 2010, lawyer offices have not stopped | | | | transfers and made some progress recently |
| buzzing with question and speculations of what to | | | | attacking these estate transfer vehicles under a |
| do next. The Congress was expected to amend | | | | step-transaction doctrine, whereby the |
| the laws by end of 2009 to prevent the repeal to | | | | government argues that funding a family |
| ever become law, but this hasn't happened. | | | | partnership and the subsequent gifting of a limited |
| So, what should clients do? While it is nearly | | | | interest to the next generation is a single |
| impossible to predict the final outcome of the | | | | transaction in substance, albeit not in form. As a |
| repeal saga, there seems to be some consensus | | | | result, valuation discounts are not allowed for lack |
| among the professionals both in lawyer offices | | | | of marketability or minority interest, without which |
| and advisory firms for nigh net worth individuals. | | | | the technique loses most, if not all. of its tax |
| First, if gifting of some assets is contemplated, | | | | advantages. Earlier this year, one of the mega-bills |
| there has not been a better time than during | | | | incorporated a long-sought provision that codified |
| 2010. The current law taxes gifts made this year | | | | an economic substance doctrine by making it a |
| at 35%, versus a 55% rate should the pre-2001 | | | | part of the Internal Revenue Code. It remains to |
| rates return for years 2011 and forward. In other | | | | be seen how that codification will impact popular |
| words, there could be a potential 57% rate | | | | estate planning techniques, as the Service has yet |
| increase in gift tax rates if the congress fails to | | | | to publish any guidance on how to comply with |
| act on the issue. | | | | the new law. However, there is pending legislation |
| Second, there is still a window of opportunity, | | | | in both Houses that would sound a death knell for |
| albeit a smaller one, to remove wealth from the | | | | all sophisticated wealth transfers vehicles involving |
| taxable estate without incurring any taxes at all, | | | | discounts on liquid assets that pass to family |
| by using a transfer of discounted FLP/LLC | | | | members. If you consider gifting an ownership |
| interests via a grantor retained annuity trust, or | | | | interest in a family partnership, the time act is |
| GRAT. The IRS has been fighting this technique | | | | now before discounts are taken away forever. If |
| for years, with mixed results. Attorneys in lawyer | | | | done by a good attorney in respectable lawyer |
| offices and private advisory firms have been | | | | offices, these transfers are still likely to achieve |
| watching and studying the IRS moves for over a | | | | the intended estate planning results, even under a |
| decade developing and refining the GRAT | | | | higher level of government scrutiny. |
| techniques. However, the Congress has been | | | | The temporary estate tax repeal also posed a |
| trying recently to give teeth to the Service in | | | | tremendous challenge on tax practitioners in |
| such controversies. Various bills were introduced in | | | | lawyer offices and CPA firms and their clients as |
| both Houses that purport to limit usefulness of | | | | it relates to testamentary bequests. Most will |
| grantor-anjuity trusts. While these changes are | | | | include a marital deduction formula that breaks |
| cropping up in almost every large bill introduces in | | | | down the decedent's estate into a spousal portion |
| Congress, they have yet to make it into the | | | | (which passes tax-free) and a so-called credit |
| legislation passed by both Houses. While it is likely | | | | shelter portion that utilizes the deceased spouse's |
| that this new anti-GRAT law will eventually pass | | | | tax exemption. Most wills by design leave the |
| this year, so far none of the bills seek retroactive | | | | maximum allowed tax-free amount to the |
| application of these changes. Of course, anything | | | | credit-shelter trust, thereby achieving the most |
| can happen in today's political environment, but | | | | tax-efficient result. Under the current law, no |
| there is a strong case to be made about the | | | | estate tax applies to an estate of the decedent |
| opportunity to enjoy a short-term zero-out | | | | who passed away in 2010. The tragic result of |
| GRAT before they are gone forever. | | | | this law is that a spouse may not have any |
| Another attractive technique, discounts on | | | | wealth pass to her or her trust. unless the will has |
| intra-family transfers of investment partnership | | | | been updated this year to account for this |
| interests, is also under Congressional scrutiny. The | | | | contingency. |