On March 14, both the Senate and House passed Fiscal 2009 budget resolutions. The House and Senate Conference Committee will now produce a joint budget resolution. While this is a nonbinding resolution, final budgets have generally been within two percent of the budget resolutions. The Senate budget resolution (S. Con. Res. 70) was passed by a vote of 55 to 44 after debate about taxes, including the estate tax. The Senate approved an amendment to the resolution, authored by Senate Finance Chair Max Baucus (D-MT), by a vote of 99-1, that would result in an Estate Tax Freeze; the 2009 exemption of $3,500,000.00 per person and 45% estate tax rate would be continued. The House budget resolution (H. Con. Res. 312), passed by a vote of 212 to 207. In light of the overwhelming margin in favor of the Baucus amendment, the probability of an estate tax freeze at the 2009 level has significantly increased following the Senate action.

A third hearing of the Senate Finance Committee was held on estate tax revision April 3. More reform proposals were discussed. These included the liquidity problems of small and family-owned businesses, the making the exemption for couples under current law portable, thereby allowing a spouse to transfer any remaining exemption to the surviving spouse, reunifying the gift and estate tax exemptions, and charitable giving under transfer taxes. No further definitive statements emerged from this session. We will keep you posted on any further action.

While the economy seems to be heading towards a recession and investment opportunities seem to be diminishing, the reduction in interest rates presents some estate planning opportunities for individuals who wish to reduce their estates. This article will discuss a few of them.

One means of wealth shifting to the next generation is through the use of loans. Clients can set up an irrevocable trust for the benefit of their beneficiaries and loan the trust money to make investments. Using the Internal Revenue Service (IRS) published rates, which are required to be used to avoid income and gift taxes, the client, for April 2008, can lend the trust at a rate of 1.85% for loans with a term of three years or less, 2.85% for loans with a term longer than three years and less than nine years and 4.4% for loans with a term longer than nine years. This creates fantastic opportunities to shift growth investments outside the taxable estate and into a trust for the beneficiaries of the client at no cost. So long as the investments beat the interest rate charged, the beneficiaries win and the client has reduced estate taxes. Also, since it is not a gift, there is no need to allocate any estate tax exemption or generation skipping tax exemption. The assets in the trust can avoid estate taxes for 360 years!!!

Another opportunity is the use of a Grantor Retained Annuity Trust (GRAT). Using a GRAT, a client can transfer assets to a trust on a gift-tax-free basis, receive the assets back over a period of years with a rate of return and any excess growth is outside the client's estate. During April 2008, the rate of return the IRS imposes is 3.45%. Therefore, if the average rate of return exceeds 3.45%, the excess passes to the beneficiaries tax free. For example, if a two year GRAT is established, the client contributes $1,000,000 and the assets of the GRAT returned 8%, the client would receive $1,052,883 and the beneficiaries would receive $75,819, gift tax free. This can be distributed via trust or outright. This procedure can be repeated every two years.

Many clients already have loans outstanding to their children or to trusts. In this low interest environment, these notes may be renegotiated at a lower rate to reduce the debt service cost and to provide greater growth outside the estate. The notes can be set up with varying due dates and principal amounts and increase the estate's tax free growth.

There are other techniques involving charitable giving that can assist a client pass assets to charity on a preferred basis. This article touches upon a fraction of the techniques available for reducing an estate in a lower interest rate environment. Please feel free to contact any of the attorneys at Morris Law Group for more information or to find out how these techniques can apply to you.

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This publication is intended for general information purposes only. It is not intended to constitute individual legal advice to any specific client.