Tax strategists have discovered that there is good news to be found in the nation’s economic recovery. Low interest rates, an unstable stock market and IRS tax exemptions have combined to allow individuals to maximize asset gift-giving through estate tax planning.
A temporary but attractive form of asset protection is the IRS gift-tax exemption. The current legal exemption is a generous $5 million, but starting in 2013, the exemption amount returns to $1 million. In regards to stock, according to the estate-tax valuation firm FMV Opinions, the IRS usually allows up to a 35 percent discount on hard-to-sell privately traded stock. When the public stock market becomes erratic, the company says discounts on private stock can rise.
The tax company employs the Chicago Board Options Exchange Volatility Index, or VIX, to gauge the future unreliability of the public stock market. The index predicts the possible unpredictability of the S&P 500. In stable economic times, the VIX hovers around 20, but when the stock market is turbulent, the number climbs. When the VIX shot up to more than 56 in 2008, privately traded stock was transferred at discounts of up to 65 percent. The estate valuation firm sees a current VIX above 40 and is recommending gift-stock discounts of up to 50 percent.
Family business or publicly traded stock transfers can be accomplished through grantor-retained annuity trusts called GRATs. Assets placed in a GRAT pay out annuities over time, but are also used to avoid taxes on future asset appreciation. If assets in a GRAT fail to appreciate, the owner can buy them back and set up a new GRAT. If the assets appreciate, the trust retains the higher value.
Loans between family members in order to fund investments can be used as an estate transfer tool. Lending money to family through a trust can allow them to buy a depressed asset and collect any appreciation value once the loan is paid.
Source: The Wall Street Journal, “How Volatility Eases Estate Planning,” Kelly Greene, Aug. 20, 2011