The December/January issue of Worth includes an article entitled "Trying Cases: Eight Moves Top Attorneys are Urging their Clients to Make." And who better to consult than our very own Stuart Morris?

1. Use It or Lose It -- Use Your Annual Exclusion
The annual gift tax exclusion amount is the amount each person can gift to any number of recipients without a gift tax consequence. This amount is $12,000 ($24,000 for gifts from husband and wife; i.e., split gifts) for 2008. The annual exclusion amount will increases to $13,000 ($26,000 for split gifts) in 2009.

When determining how much annual exclusion you have available to give to a specific person, count the beneficiary's share of insurance premiums contributed by you to any Insurance/Irrevocable Trust or by other gift but don't count any gifts for education tuition or medical expenses that you paid directly to a school or medical provider.

The annual exclusion does not carry over to future years so use it or lose it.

2. Utilize Your Gift Tax Exemption
Each person has a lifetime gift tax exclusion of $1,000,000 (this amount is not slated to increase like the estate tax exemption). Thus, an individual can make gifts in excess of the annual gift tax exclusion amounts (discussed above) of up to $1,000,000 during his or her lifetime, before having to pay any gift tax. Gifts between spouses are not subject to gift tax as long as the receiving spouse is a U.S. citizen.

Gifts to a non-citizen spouse are not eligible for a marital deduction or the gift tax exemption but are eligible for a special annual exclusion amount. This non-citizen spouse annual gift exclusion is $133,000 for 2009 and will continue to be indexed for inflation in future years.

Gifts can be made outright, to UTMA accounts or to irrevocable trusts.

3. Pay Tuition and Medical Expenses
Payments for tuition and medical expenses are not considered taxable gifts and are not included in annual exclusion limits or in the $1,000,000 lifetime exclusion. A donor, for example, can pay the tuition expenses for a donee at any educational level without any gift tax consequence. In order to be exempt from the gift tax, payments must be made directly to the educational institution or medical professional.

4. Preserve Your Estate Tax Exemption
The estate tax exclusion is currently $2,000,000. In 2009, however, the combined estate tax exclusion for each individual will increase from $2,000,000 to $3,500,000 (the "exclusion amount"). In light of the increase in the exclusion amount, a husband and wife will be able to protect up to $7,000,000 (in 2009) from the federal estate tax with proper estate planning.

A proper estate plan, at a minimum, requires the first spouse to die to title assets valued at $3,500,000 in his or her own name (or in their revocable trust) for which the surviving spouse is not the designated beneficiary, and a will or revocable trust that carves out the exclusion amount into a trust for the surviving spouse.

It is important to note, while the estate tax exemption is scheduled to increase to $3,500,000 in 2009, followed by the repeal of the estate tax for one year in 2010, in 2011 and thereafter, the estate tax applicable exclusion amount will decrease to $1,000,000 (adjusted for inflation). Additionally, the top current federal estate and generation-skipping tax rate is 45% and, unless the law is changed, will stay at that rate through 2009. In 2010, the federal estate and generation-skipping tax rate is scheduled to fall to 0%, and then revert to a top rate of 55% in 2011.

The top gift tax rate is also currently 45%. However, even after the scheduled repeal of the estate tax in 2010, certain gifts will remain subject to tax at the top individual income tax rate, which is currently 35%.

5. Fund a 529 Plan
Section 529 of the Internal Revenue Code affords a taxpayer with an opportunity to establish a special account for the purpose of paying higher education expenses. Investments in a 529 Plan accumulate income tax free and distributions used for qualified education expenses are not subject to federal income tax. One common technique is "frontloading" gifts to a 529 education savings plan. You can make five years' worth of annual exclusion gifts, or $60,000, to a 529 plan in 2008 for the benefit of any one person, but annual exclusion gifting to that person over the next four years will be reduced by $12,000 per year. This is especially effective when markets are depressed.

6. Create and Fund a Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust ("GRAT") is an irrevocable trust into which you transfer assets into the trust and retain the right to receive annual payments of a fixed dollar amount for a specified term of years. At the end of the trust term, the remaining trust assets pass to family members.

The IRS assumes that a GRAT will grow at a rate equal to the 7520 rate at the time the trust is established (3.4% for December). Growth which exceeds the assumed rate passes to trust beneficiaries free of gift and estate tax. The lower the hurdle or interest rate, the larger the potential gift. GRATs are a preferred wealth transfer option in a low interest rate environment because it is relatively easier to outperform the hurdle rate than in a high interest rate environment.

GRATs are also "grantor trusts" which means that the grantor (creator of the trust) is taxed on all of the income. Payment of these income taxes is effectively a tax-free gift to the trust beneficiaries since the trust assets can grow without reduction for income tax payments.

In short, 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.

7. Create and Fund a QPRT
Real estate values are presently low and many clients are considering transferring their vacation properties or personal homes to their descendants. Under current conditions, individuals have an opportunity to make a discounted gift using a Qualified Personal Residence Trust ("QPRT").

If structured properly, the QPRT will freeze the value of the taxpayer's residence at the time they create the trust and transfer the residence thereby resulting in significant estate tax savings. QPRTs are often considered most effective when interest rates are high; however, while rates are currently low, this may be offset by current low housing prices.

After the gift, the donor can continue to live in the residence for the term of the trust, and potentially longer by renting the residence.

8. Gift FLP Interests
The Family Limited Partnership (FLP) is a well established estate planning tool. The family wealth can be transferred into the FLP by the original partners. Creditor protection is afforded as in other limited partnerships. The entity could be controlled by the general partner who can be funded with as little as 1% of the total assets. Annual exempt gifts of partnership interests can be made at a discount to beneficiaries.

For example, an individual with three children can utilize the annual exclusion and gift $36,000 per year in value without making a "taxable gift." Assuming no other gifting and a 28% or more valuation discount, if this individual gifts a 5% interest in a $1,000,000 family limited partnership, then there would be no reportable gift, although they will have removed $50,000 in value from their taxable estates.

The amount of discount to be taken will vary based upon the circumstances of the partnership arrangement. For most gifts of this nature, we recommend appraisal reports to determine the discount amount to be taken.

Clients with family limited partnerships who have not engaged in annual gifting may wish to begin doing so based upon the current political and market environment.

9. Intra-family Lending
Low interest rate environments are an excellent time for a legally documented intra-family loan. 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 can lend money to the trust with extremely low interest rates. 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!!! 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.

10. Freeze Transaction
An effective wealth transfer technique involves a freeze transaction whereby future growth in investments are sold to trusts which benefit a spouse and/or descendants. An example would be a sale of an ownership interest in a family limited partnership to a trust for children in exchange for a long-term low interest promissory note.

If a client owns a 50% limited partner interest in a limited partnership owning $2,000,000 in assets, then the 50% limited partnership interest, representing $1,000,000 in assets, might be sold to the trust for a $700,000 promissory note, taking into account a 30% valuation discount. Under this transaction, the growth on $1,000,000 worth of assets inures to the trust, which owes back only $700,000 plus interest to the client. Consequently, this immediately moves $300,000 worth of wealth from the client's taxable estate, and if the $1,000,000 worth of assets increases, the difference between the asset growth and $700,000 plus interest has been shifted to the trust for the children.

11. IRA Charitable Rollover
Renewed federal legislation permits individuals 70 1/2 and over to again make a tax-neutral distribution of up to $100,000 from their Individual Retirement Account (IRA) in 2008 and 2009. The charitable transfer may be earmarked for a specific use within a charity but it may not be designated for a donor advised philanthropic fund, supporting foundation, charitable remainder trust or charitable gift annuity. A transfer from an IRA, under this law, is excluded from federal income tax, and qualifies toward the mandatory required minimum distribution but does not qualify for a charitable deduction.

Please help us welcome the new members of our team:

• Allison Tripp, Estate Planning and Corporate Paralegal
• Heather Graboyes, File Clerk
• Gisele Woodley, File Clerk

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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.