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A great time to be an heir

By Judy Martel · Bankrate.com
Tuesday, August 30, 2011
Posted: 3 pm ET

What a great time to be the offspring of the super-rich. A combination of favorable gift tax legislation and low interest rates is causing the wealthy to consider transferring money and assets to the next generation while the giving is good.

Money buys happinessSince Congress increased the exemption for federal gift tax to $5 million ($10 million per couple), wealthy families have been looking for ways to remove assets from their estate before the exemption reverts back to $1 million at the end of 2012. The current low interest rates are sweetening the pot.

Two strategies that have been around for a while are increasing in popularity are the Grantor Retained Annuity Trust, or GRAT, and intrafamily loans.

  1. GRATs are set up to allow future appreciation of assets to pass on to children and grandchildren, so they are popular when interest rates are low because the potential gift to heirs will be larger. As long as the trust exceeds what's called the "hurdle rate," which is determined by the IRS, future appreciation will be transferred tax-free. The rate is currently 2.2 percent. The grantor receives an annuity for a specified term, and at the end of the term, the assets pass to the heirs. The term of the trust can be as little as two years, so if you have rapidly appreciating assets, it's a good way to get them out of your estate and allow your children to enjoy the bounty.
  2. Intrafamily loans are also popular when rates are low. For example, the Applicable Federal Rate set by the IRS for such loans in August is 0.32 percent for a three-year term. In addition, the lender can avoid gift tax liability. Loans up to the amount of the gift tax exemption made to a family trust could be used to purchase depressed assets such as real estate or equities, giving heirs the benefit of future appreciation after they've paid back the loan.

For rich families with huge potential estate tax liability, this is a good time to look at ways to reduce the burden and help family members at the same time.

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