You may want to transfer some assets to your loved ones while you are still alive as part of what could be considered to be a comprehensive estate plan. The thing is, you have to be aware of the threat that is posed by the federal gift tax.
The gift tax is unified with the estate tax, so although there is a $5.12 million exemption right now this includes both gifts and the value of your estate. So if you want to preserve your estate tax exclusion you do not want to use it giving gifts while you are still alive.
There are however some strategies that can be implemented that could potentially result in a tax-free transfer of assets to your loved ones. One of these would be the “zeroed out” GRAT strategy.
A GRAT is a grantor retained annuity trust, and with these vehicles you as the grantor receive annual annuity payments throughout the term of the trust. You also name a beneficiary who would inherit any remainder that may exist in the trust after the expiration of its term.
This funding constitutes a taxable gift, and the IRS adds estimated appreciation by utilizing 120% of the federal midterm rate. You arrange for your annuity payments to equal the entirety of the taxable value of the trust, and this is what is known as zeroing it out.
Your objective is to fund the trust with assets that will appreciate at a rate that exceeds the IRS estimate. This excess appreciation will remain in the trust after the expiration of the term and your beneficiary will assume ownership of it free of taxation.
To discuss this and other tax efficiency strategies with an expert, don’t hesitate to take action and arrange for a consultation with a good Somerset County estate planning lawyer.