Raleigh NC Wealth Transfer

Wealth Transfer
Wealth transfer either occurs during an individual’s lifetime or at their death.  For individuals with taxable estates, gifts during their lifetime can greatly reduce the amount of estate taxes payable at their death.  Using advanced planning techniques such as Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts are effective ways of transferring an individual’s wealth without decreasing the amount of the individual’s unified credit amount. Below is overview of each advanced estate planning technique:  

Grantor Retained Annuity Trusts (“GRAT”)
Under a GRAT, the owner of property transfers all or a portion of their property into an irrevocable trust(s) that satisfies the requirements of Internal Revenue Code Section 2702 and its corresponding regulations.  The GRAT’s terms specify that the grantor retains the right to receive annual annuity payments for a designated period of years.

GRATs are structured to last for any number of years.  However, the length of the term will affect the interest rate of return required to be earned by the Grantor.  The Internal Revenue Service under Section 7590 categorizes these terms as: Under 3 year term, 3-9 year term and greater than 9 years.  Each category has a different applicable interest rate. 

To value the annuity stream, the IRS uses the interest rate determined under Section 7520 in effect for the month of the transfer to the trust.  By varying the trust term and the amount of the annuity, it is possible to reduce the value of the remainder interest (subject to gift tax) to a relatively small amount – even to zero as a result of the Tax Court’s decision in the Walton case.

If the grantor survives the end of the GRAT period, all assets then remaining transfer to the grantor’s designated beneficiaries (or to trusts for their benefit) with no transfer taxes.  If the property transferred to the GRAT produces income or appreciation greater than the IRC Section 7520 rate in effect on the date of the transfer, the excess value will pass to the beneficiaries chosen.  The beneficiary may be a trust of the Grantor.

If the GRAT is so structured so that the present value of the annuity payments equals the initial value of the interests in the property to the GRAT (after taking into affect all applicable valuation discounts), the transfers of such interests to the GRAT will not generate any gift tax liability thus reducing the amount of the individual’s unified credit amount. 

Intentionally Defective Grantor Trusts (“IDGT”)
Intentionally Defective Grantor Trusts are typically used in conjunction with the Trustmaker selling assets to an irrevocable grantor trust.  This technique works to freeze, or set the value, of the property sold to the trust in exchange for a promissory note payable from the Trust to the Trustmaker.  The transaction helps to pass an asset in a gift tax free manner from the Trustmaker down to the beneficiaries of the trust.

Through the use of an IDGT, the Trustmaker is able to transfer a portion of the Trustmaker’s assets out of his estate and save on estate taxes, without the imposition of substantial gift taxes or the use of the Trustmaker’s gift tax exemptions. Any appreciation in the assets in the IDGT will also pass estate tax free.  Further, the payment of income taxes by the Trustmaker on the income generated by the trust assets is done without gift tax consequences, and is a good planning technique to transfer more wealth out of the Trustmaker’s estate for the benefit of the beneficiaries of the trust.

While an Intentionally Defective Grantor Trust typically involves the sale of assets to the IDGT, the Trustmaker can also make an outright gift to an IDGT using the Trustmaker’s gift tax exemptions.  The general consensus is that the IDGT should have assets worth a minimum of ten percent of the value of the assets being sold to the trust, and a gift to the trust can help to ensure that the Intentionally Defective Grantor Trust is respected by the Internal Revenue Service.