We spent most of 2010 waiting for new estate tax legislation. With autumn in full swing, it seems less and less likely that Congress will be able to agree on a new game plan. For 2010 only, there is no federal estate tax. (The federal gift tax and the Connecticut estate tax remain in effect.) If no new legislation is passed, in 2011, the federal estate tax will return with a $1 million exemption and tax rates ranging from 41% to 55%. This change will subject significantly more estates to federal estate tax. The following planning opportunities may still be pursued in 2010 to reduce the tax hit in 2011 and beyond:

Taxable Gifts. A donor may make tax free gifts of $13,000 per donee each year (called the “annual exclusion”) and additional gifts totaling $1 million (the “lifetime exemption”) before having to pay any gift tax. In 2010, gifts in excess of the annual exclusion and lifetime exemption will be taxed at 35% rather than potentially at 55% in 2011. This represents a 20% tax savings available this year only!

Short-Term Grantor Retained Annuity Trust (“GRAT”). Congress has attempted to eliminate short-term GRATs, but has not yet done so. A GRAT is a trust to which the donor makes a gift and from which the donor receives a stream of future payments (an “annuity”) for a set number of years. The “gift” for gift tax purposes is calculated based on the size of the gift, the number of years the annuity is paid, and the federal interest rate (the “7520 rate”). At the end of the annuity payments, any funds remaining in the trust pass to the donor’s children. GRATs are most effective if created when the 7520 rate is low and the assets gifted to the trust appreciate quickly. With a GRAT, you keep the underlying property and gift away the appreciation at a very low tax cost.

Intra-Family Loans. Currently, funds may be loaned to a family member at a very low interest rate – 0.35% for loans of less than three years and 2% for loans up to nine years. If the loaned funds are invested and appreciate more than the interest charged on the loan, you have removed this appreciation from your estate. At your death, the note could be part of a child’s share of your estate. All of the appreciation on the loaned property is a tax-free gift to the child.

These opportunities may or may not be right for you but are worthy of consideration as a means to minimize estate taxes. For more information, please contact Heather J. Lange (hlange@brodywilk.com).