When the popular thought was permanent repeal of estate tax, Robert
N. Greenberger, a tax partner in the Advisory Business Services Department at
Habif, Arogeti & Wynne, LLP, predicted that
estate taxes would not be repealed. With
President Obama taking office, Greenberger
sees more adjustments ahead.
In his fourth interview on estate taxes for
Smart Business, Greenberger provides
more insight on the tax’s current status and
how business owners can plan for the near
future.
What changes can we expect in regard to
estate tax rates?
The estate tax levied a 55 percent maximum tax rate on all inherited assets above a
$1 million exemption. The exemption level
has risen and the tax rate has been dropping
since 2001, down to 45 percent with a
$3.5 million exemption. Current law calls for
the tax to be repealed in 2010 with a reversion back to 55 percent tax rate and $1 million exemption in 2011. The estate tax rates
also apply to gifts during life; however the
gift tax exemption has remained fixed at
$1 million.
Obama proposes freezing the estate tax at
2009 levels — a 45 percent tax rate on
estates valued at more than $3.5 million.
Married couples can combine their exemptions for a total of $7 million. Obama’s plan
would completely exempt 99.7 percent of
estates from taxation.
If 99.7 percent of estates are exempt,
shouldn’t the estate tax just be repealed?
According to the Treasury Department, a
permanent repeal would cost $522 billion in
lost tax revenues over the next decade. The
cry from ‘death tax’ opponents that many
small businesses and farms are devastated
by estate taxes is a myth. The Urban
Bookings Tax Policy Center reported that
when the exemption was $1.5 million, only
440 small businesses and farms were hit
with this tax. An analysis by the
Congressional Budget Office added that at
the $3.5 million exemption level, only 159
small businesses and farms would owe any
estate tax.
What about taxpayers who are still subject to
the 45 percent rate?
The unfortunate taxpayers that are still
subject to estate tax undoubtedly are not
completely satisfied with a reduction in the
estate tax rate from 55 percent to 45 percent. Almost half of their estate will fall into
the hands of the IRS. But there is hope for
them. First of all, among the estates that do
owe taxes, the ‘effective’ tax rate — which is
the percentage of the estate that is paid in
taxes — averaged about 20 percent in 2005
(the latest year for which IRS data is available). As for planning for estate tax reduction, now is an opportune time. The current
low valuations in the stock market and
depressed real estate values provide estate-planning and gifting opportunities. In addition, low interest rates provide for certain
gift-leveraging techniques, which rely on the
IRS’s monthly published Applicable Federal
Rates (AFRs). A combination of low valuations and low AFRs creates phenomenal
gift-leveraging techniques for those that
believe in the long-term strength of the U.S.
economy.
Are there any other advantages to implementing gifting or estate tax reduction strategies now?
Yes. President Obama’s campaign position
included attacks on valuation discounts.
Minority interest, fractional interest and
lack of marketability discounts have
allowed taxpayers to significantly reduce
the value of assets subject to gift and estate
tax. These discounts may be limited or disallowed by future legislation, so implementing techniques before Congress eliminates
or restricts such discounts is imperative.
What are some specific planning techniques?
Annual gifts to donees are partially exempt
— the annual exclusion rose from $12,000 to
$13,000 in 2009. A husband and wife with
three children and seven grandchildren
could transfer $260,000 per year out of their
estate with no gift tax consequences.
Further gifting to utilize the gift tax
exemption amount of $1 million (per donor)
will pass appreciation and income from the
gifted assets to recipients.
Utilizing a Grantor Retained Annuity Trust
(GRAT) remains a beneficial estate-planning tool. Appreciation of assets in excess of
the IRS AFR hurdle rate (3.6 percent at the
time of publication) would pass gifts tax-free to the grantor’s designated beneficiaries. If the assets do not appreciate above the
IRS hurdle rate during the term of the GRAT,
the assets would come back to the donor
with no economic downside.
Use of an installment sale to a grantor
trust would allow you to lock in low AFRs
for several years. This would allow for a
shift in value (above the AFR hurdle rates)
and also protect against possible changes in
law that would restrict discounts and limitations on GRATs.
There are many other viable estate-planning tools and techniques that should be discussed with your tax adviser, but the key is
to plan ahead.
ROBERT N. GREENBERGER, CPA, PFS, AEP, MAcc, is a tax partner in the Advisory Business Services Department at Habif, Arogeti &
Wynne, LLP. He has more than 25 years of experience with a strong concentration in taxation, estate tax planning and closely held businesses. He has achieved the Accredited Estate Planner designation and assists with the planning and implementation of family limited partnerships, trusts, Subchapter S corporations and estate/gift tax reduction. Reach him at (404) 814-4949 or [email protected].
