Estate Tax Strategy for Appreciating Assets

When you have accumulated a significant store of wealth, you can breathe a sigh of relief and enjoy your success. At the same time, you can also gain a sense of satisfaction with regard to your legacy. Your wealth can be passed along to the next generation, and things will be easier for your family going forward.

Unfortunately, things can get a little bit complicated by the federal estate tax. This tax can do considerable damage because it carries a hefty 40 percent maximum rate.

You cannot give gifts while you are living to avoid the estate tax, because there is a federal gift tax. It exists to stop people from sidestepping the estate tax through lifetime gift giving. The unified gift and estate tax exclusion is $5.43 million for the rest of 2015. This is the amount that you can transfer before the tax would be applied.

One detail that must be mentioned is the fact that you can utilize the unlimited marital deduction to transfer any amount of property to your spouse tax-free, but transfers to others are subject to taxation.

If you are exposed to the federal estate tax, tax efficiency strategies are going to be important for you. One possible component that you could include in your wealth preservation plan is a legal device called a grantor retained annuity trust or GRAT.

This strategy can be effective if you are in possession of highly appreciating assets. It is particularly viable when federal interest rates are low, and they have been low for a number of years at this point.

You fund the trust with assets that you expect to appreciate considerably over the coming years, and you name a beneficiary who would assume ownership of anything that may remain in the trust after the expiration of its term.

Since a transfer to a beneficiary may take place, the gift tax can be applicable. The Internal Revenue Service adds anticipated interest to the taxable value of the trust. The hurdle rate is used; this is 120 percent of the federal midterm rate.

As the grantor of the trust, you accept annuity payments throughout the duration of the term. The idea is to “zero out” the grantor retained annuity trust. You arrange for the annuity payments to equal the entire taxable value of the trust as it has been determined by the IRS.

Theoretically, there will be nothing left in the trust at the end of the term. However, the assets may appreciate above and beyond the hurdle rate that was applied by the Internal Revenue Service. If this takes place, there will be a remainder, and it will be transferred to the beneficiary free of the gift tax.

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