The Perfect Storm for Estate Planning

It's an interesting time in the world of estate planning, according to an article by Janet Kidd Stewart of the Chicago Tribune. On one hand, conditions are such that there has never been a better time for wealthy clients to reduce their estate tax burden. On the other hand, there has never been a more unstable economic situation, making people hesitant to give away assets in an effort to reduce taxes. See a copy of the article here.

But I think, with a little crafty planning, clients can have their cake and eat it too. What I mean is that we can help clients take advantage of this unique opportunity to reduce estate taxes, while at the same time making sure the estate planning will never cause the client to run out of money.

Why is this time such a great opportunity for estate planning? Well, the factors of extremely low interest rates and low assets values combine to create great opportunities:

1. Low Interest Rates. The Applicable Federal Rate is extremely low right now. This rate, published monthly by the IRS, is the minimum rate of interest one can charge for interfamily loans without such loan being characterized as a gift. The most commonly used application of this technique in my practice is to have my clients sell assets, such as investments or real estate, to an Irrevocable Trust in exchange for a Promissory Note bearing interest at the Applicable Federal Rate. If the assets grow at a rate higher than the Applicable Federal Rate, then that excess growth grows out of the client's estate. Given that the Applicable Federal Rate is as low as 1.36% right now, this is not hard to accomplish.
2. Low Asset Values. Given market conditions, both real estate and investments are extremely low values. These assets are sure to regain the value upon the recovery of the economy. However, their low value for the time being presents a great opportunity to move those assets out of your estate, which means all subsequent appreciation will grow outside of your estate.

In addition to the low interest rate and low asset value environment, I have developed techniques to make sure that client retain an adequate interest in assets they give away, in order to meet living expenses.

For instance, my Family Wealth Protection Trust allows clients to sell assets in exchange for a Promissory Note to move assets out of their estate. The trust offers the following advantages:

1. Frozen Value. Assets sold to the trust are frozen in value, meaning that all future appreciation is removed from the estate. This makes the sale a "freeze" transaction. Done properly, we can make sure that client estate tax burden does not increase as their wealth increases.
2. Access Provision. We can include a provision in the Family Wealth Protection Trust that allows the client to access the trust assets if all other assets are exhausted. This give the client the assurance that while they are saving a great deal in estate tax, they are not doing so at the expense of their lifestyle needs.

In summary, there has never been a better time for wealthy clients to reduce their estate tax burden. While this is an economic time of uncertainty, this should not prevent wealthy clients from taking advantage of this unique opportunity.