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A Low Interest Rate Environment and Depressed Valuations Create Valuable Opportunities for Family Wealth Transfers
A Low Interest Rate Environment and Depressed Valuations Create Valuable Opportunities for Family Wealth Transfers

The current recession has played havoc with the stock market, real estate and the value of family businesses. Depressed valuations and the current low-interest rate environment, however, have created valuable opportunities for passing wealth to your children and grandchildren. Do not ignore one of the few advantages of the recession by allowing these opportunities to pass you by!

In this grim economic climate where the value of so many assets are depressed, you may be finding many investment opportunities. If you make the investment yourself or retain an asset whose value has declined, the asset you hold and all future appreciation will grow in your gross estate and will therefore be subject to estate taxes at your death, robbing your family of anywhere up to 55% of its value.

If you are making a new investment, why not instead loan the necessary cash to your children or grandchildren and allow them to make the new investment in your place? Provided you charge a minimum amount of interest equal to the applicable federal rate (the "AFR") published monthly by the IRS* , there will be no gift tax consequences. This is particularly advantageous if you have already used your lifetime gift tax exemption. Your child or grandchild will give you a promissory note calling for interest only during the loan term you choose with a balloon principal payment at the end of the term (the interest rate can be locked in based on current low rates). By that time, the investment should have appreciated sufficiently to pay off the note. Meanwhile, the investment and its appreciation have been growing outside your gross estate, and will therefore not be subject to estate taxes at your death. The same theory applies to assets you currently own that have depressed values and are expected to appreciate. Why not remove these assets from your estate now?

Having assets owned by trusts can substantially enhance tax planning benefits. Many of you have created grantor trusts for the benefit of your descendants. A loan to a grantor trust has many advantages. Once again, all appreciation on the investment purchased directly by the trust will not be included in your gross estate. Even if you die before the promissory note is repaid in full, only the outstanding balance will be includable as an asset of your estate for estate tax purposes, not the full value of the appreciated investment. An added benefit to using a trust is that your descendants will be provided with asset protection in the event of a divorce or lawsuit as long as the investment remains in trust. Furthermore, you, as the grantor of the trust, will continue to pay income tax on all income earned by the assets held in the trust, as you and the trust are considered identical for income tax purposes, meaning that the assets you’ve set aside for your descendants will grow continuously without reduction for income taxes; nor will you be required to report and pay income tax on the interest paid to you by the trust. The income tax that you pay for the trust is a tax free gift!

We strongly encourage you to look on one of the few bright sides of the current economic environment and take advantage of it for estate planning purposes. It is generally believed that interest rates will soon begin to rise. Inflation may also increase valuations. If you have a business or real estate investment with a current low valuation which you expect to appreciate in value or plan on making a new investment, take action immediately, before these opportunities disappear!

* For the month of February 2010, the short-term AFR for a loan with a term of up to three years is .72%, the mid-term AFR for a loan with a term between three and nine years is 2.82%, and the long-term AFR for a loan with a term of longer than nine years is 4.44%.
Maurice R. Kassimir, Esq.
Maurice Kassimir & Associates, P.C.
mkassimir@mkpclaw.com
(212) 790-5719

Questions?

If you have any questions regarding this matter or any other estate planning techniques, please contact a Maurice Kassimir & Associates, P.C. Trusts & Estates attorney or e-mail us: mkassimir@mkpclaw.com.

(212) 944-1377

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