“With recent cases rejecting the IRS’s policy arguments against defined-value transfers, there is little doubt they are becoming a protected mechanism for transferring hard-to-value assets. Individuals who structure them properly with guidance from a knowledgeable advisor shouldn’t encounter problems—and will have stronger support for such gifts —should the IRS pursue action,” said Morgan. “This is one more reason for individuals to make beneficial gifts now and take maximum advantage of the current, unparalleled gift tax exclusion.”

Defined-value transfers are a mechanism for taxpayers to gift hard-to-value assets, such as business interests or land. With these transfers, the gift is a stated amount of the asset’s value rather than a percentage; for example, $234,000 instead of 4%. Historically, recipients of percentage-interest gifts have struggled with the unintended tax consequences of the gift being revalued by the IRS at more than the stated amount. By giving a specified dollar amount of value, rather than a set amount of an asset, the giver hopes to set the value of the gift and prevent a revaluation from creating an unexpected tax liability.

The IRS has challenged defined-value transfers, just as it has argued against other methods of eliminating the possibility of additional taxation for the donor. However, with recent courts disagreeing—and the most recent case (Wandry v. Commissioner) offering the strongest dissent, the IRS may find itself being billed for legal fees if it continues to pursue this action.

“The courts have clearly confirmed that defined-value transfers are a legitimate mechanism for gifting assets without the shadow of future IRS scrutiny and liability risk,” says Morgan. “This shift will help people with hard to value assets take full advantage of the unprecedented gifting opportunities created by the gift tax exemption which exists for 2012.”

An Ethical Will is a statement from you (in writing, on video, in your voice, or in some combination) to your loved ones. It is intended to provide your loved ones a sort of non-economic inheritance, in addition to any assets which you may leave them after your death. The Ethical Will allows you to let your friends and family know what you believe to be important in life, and to provide them with the benefit of your experiences and acquired knowledge.

In preparing an Ethical Will, you may want to imagine that you have only a very short time left to live, and then try to imagine what values, philosophy, or other information you would want to tell your loved ones before your death. The topics covered in an Ethical Will can be as broad or as narrow as you like, and can touch on religious issues, moral issues, what is most important to you, what you have learned in going through life, who impacted your life, family history, significant decisions you made in your life and their effect, how you wish to be remembered, the legacy you wish to leave, your hopes and dreams for your loved ones, and anything else you feel is important. You can prepare different Ethical Wills for different family members, rather than trying to address everyone in a single document. The Ethical Will(s) should generally be kept with your other estate planning documents.

As a caveat, you should generally avoid trying to explain the reasons behind your estate distribution plan in an Ethical Will, since you could inadvertently increase the risk of a challenge by doing so. You should also remember that your Ethical Will is not the place to discuss how assets should be handled or distributed after your death – that is the purpose of your legal documents. The Ethical Will should focus on other issues, such as morals, values, important life lessons, fond memories.

How should your Ethical Will be prepared? An Ethical Will can be as simple as a written letter or a recording of your spoken words, or as complex as a full-fledged video production. While even a simple, written Ethical Will can provide tremendous benefits for your loved ones, the addition of your face and voice can really add to these benefits.

While Ethical Wills have a long history in some cultures, most people never take the time to prepare these incredibly powerful documents. However, the benefits of Ethical Wills can be tremendous. Think how your loved ones will feel when they are effectively able to hear you speak to them while they are still mourning your loss. Finally, think what the results could be if you prepared and provided an Ethical Will to your loved ones during your lifetime – to enable you to see the results and stimulate some potentially wonderful family interaction.

We have been recommending for years that our clients prepare Ethical Wills. We can tell you from experience that when an Ethical Will is read after a client’s death, the effect is usually quite profound. The client’s loved ones are left with wonderful thoughts about their loved one and often feel even closer to the client as a result. The results for clients who are willing to share their Ethical Wills during their lifetimes can be even greater, and these clients get the added joy of seeing the results in person. We thought that The Last Lecture, by Randy Pausch and Jeffrey Zaslow, serves as an excellent example of both an Ethical Will and the benefits which can come from sharing one’s Ethical Will during one’s lifetime. We liked the The Last Lecture so much that we have been giving copies of the book to our estate planning clients for the past several years.

Since we drafted our original Ethical Will newsletter, we have discovered some additional, incredible resources which can help you prepare your own Ethical Will. There are experienced professionals who can help guide you through the process of creating the vision or story that you wish to pass on to your loved ones. Two such professionals are Susan B. Turnbull and Jim Barkley.

• Susan B. Turnbull and her staff at Personal Legacy Advisors provide education and assistance in preparing Ethical Wills. The company’s helpful resources include a book entitled The Wealth Of Your Life. This book was written by Susan Turnbull, and it provides an excellent step-by-step guide for creating Ethical Wills.
• Jim Barkley at Sonant History is a “professional personal historian” who helps his clients prepare audio and video Ethical Wills. The audio Ethical Wills allow his clients to tell their stories with professional recording, guidance and editing, and to receive a CD which can be passed down to loved ones. Jim can also help clients put together video to go with the audio – slide shows of favorite photos and even video recordings.

For those who would like even more information on Ethical Wills and how to prepare them, here are a few additional resources:

• http://en.wikipedia.org/wiki/Ethical_will
• So That Your Values Live On: Ethical Wills and How to Prepare Them, Riemer, Jack (2009)
• http://www.ethicalwill.com/index.html
• The Ethical Will Writing Guide Workbook, Baines, M.D., Barry K. (2001)
• Ethical Wills: Putting Your Values on Paper (Second Edition), Baines, M.D., Barry K. (2002, 2006)

Although we have addressed these issues before, as a refresher, here are the benefits available to those who make gifts in 2012 under the current federal gift tax exclusion and GST tax exemption:

1. Overall wealth transfer tax savings – potentially millions of dollars.
2. Assets given away in 2012 in a properly structured transfer may be removed from the giver’s future estate for estate tax purposes. In addition,  a well-designed gift can remove all of the future income from the gifted assets and the future appreciation in their value from the giver’s future estate. The giver who uses a properly-structured grantor trust as a recipient can also effectively make additional, tax-free gifts by paying the annual income taxes on the earnings on the gifted assets.
   If a properly-structured trust is used as the recipient of gifts, the gifted assets may  be sheltered from unwanted outsiders, including your beneficiaries’ creditors, their spouses in the case of divorce, and potential predators.
3. If a properly-structured trust is used as the recipient of gifts, the giver may also be able to protect the gifted assets from his or her own potential future creditors, but also retain practical access to (and possibly control over) the gifted assets.  This practical access to gifted assets can help ensure that the gift giver does not feel financially insecure after the gifts are made.
4. Properly-structured perpetual or “dynasty” trusts (those which are designed to last for hundreds of years or longer) can help ensure that the above benefits are available to many generations of the giver’s beneficiaries, and to the extent the trust is GST-exempt, it may avoid having additional wealth transfer taxes become payable each time assets move from generation to generation.
5. The current economic environment, in which many asset values are depressed and interest rates are at historic lows, actually makes this a perfect time to make gifts, since these factors can really help maximize the benefits of gifting.

While the chance to take advantage of the great benefits of making gifts exists through the end of 2012, there is no guarantee that the current opportunities will exist beyond December 31, 2012. Not only is the 2010 Tax Act set to sunset, but President Obama, Congress and the Treasury Department (IRS) have been considering potential major changes to the federal wealth transfer tax laws. The latest example of these considerations can be found in the President’s 2013 Budget and the Administration’s explanations of its provisions, which are spelled out in the so-called “Green Book.” The proposals found in the Green Book for 2013 include changing the federal wealth transfer tax exclusion amounts back to their 2009 levels (a $3,500,000 million estate tax exclusion, a $3,500,000 GST tax exclusion, and a $1,000,000 gift tax exclusion, each with a flat 45% tax rate) and making permanent the rules which allow “portability” of the federal estate tax exclusion (the transfer of a deceased person’s estate tax exclusion to his or her surviving spouse). However, some of the other proposals include major changes to many of the rules that most estate planners rely upon, including, among others, the “grantor trust” rules. One of the Green Book proposals which estate planners find most frightening is the one which would cause a grantor trust to be included in the estate of its grantor for federal estate tax purposes, and would cause distributions made from the trust during the grantor’s lifetime to be subject to federal gift taxes. This proposed change, as described in the Green Book, will only affect (1) trusts created after the effective date of the change and (2) the portion of trusts created before the effective date which are attributable to contributions made after that date. Another change proposed by the Green Book would limit the benefits of the GST tax exemption for trusts created after the effective date of the change, so that federal GST taxes would apply to the trust again after about 90 years. We do not expect that either of these proposed changes would be enacted before the end of 2012, but after that, who knows?

The grantor trust rules and the federal GST tax rules are technical in nature, and we won’t try to explain them here. However, please note that the grantor trust rules have long been used by estate planners because they allow the creation of trusts which exist and have legal significance for wealth transfer tax and state law asset protection purposes, but which are effectively non-existent for income tax purposes. In the hands of experienced estate planners, the dual nature of a grantor trust helps make their use incredibly beneficial from both a tax and non-tax perspective. The income of a grantor trust is taxed to the trust’s creator (the grantor), and the grantor’s payment of the taxes is not considered an additional gift to the trust. This effectively allows the assets inside the trust to accumulate on an income-tax-free basis during the grantor’s lifetime. In addition, because the grantor trust is effectively the grantor for income tax purposes, the grantor can  borrow from or loan to the trust without the need for the grantor or the trust to report taxable interest income (although the loan should carry interest), and a the grantor can sell to or purchase assets from the trust without triggering capital gain or loss reporting. For income tax purposes, it is as if the grantor is transacting with himself.  The key is for such transactions to be structured at arms-length, full fair market value basis.  Grantor trust status is the key component to enabling gifts to be structured as legally effective but practically invisible. For example, most standard irrevocable life insurance trusts (“ILITs”) are set up to be “grantor” trusts. A properly-structured ILIT can allow its creator to remove the death benefits on his or her life insurance policies from the estate tax system while using the gift tax annual exclusion to pay the policy premiums on a gift tax free basis.  A properly-structured ILIT can also be used to engage in other transactions, as discussed above, while still providing impressive wealth transfer tax savings and the many significant state law asset protection benefits of a trust. The GST tax exemption adds another layer of benefit if it is properly applied to a grantor trust, since it can allow the trust to last for a very long time or, under current federal law and the laws of some states, potentially forever, and for the trust’s assets to be exempt from future federal wealth transfer taxes during its entire existence.

Trusts set up, fully funded, and made GST tax exempt prior to the sunset of the 2010 Tax Act at the end of 2012 and the enactment of any future changes to the grantor trust and GST tax laws are likely to be shielded from the impact of these changes. As we mentioned earlier, however, the clock is ticking and the time to take advantage of these great opportunities is running out. If you have considered taking advantage of these opportunities, you need to start moving now. You can make a gift to a flexibly structured trust using just about any asset– cash, marketable securities, business interests, land or otherwise, but you must get the trust set up and the gift completed before the end of 2012. Those who do so can then worry about changing the trust’s investment profile later, even potentially using the grantor trust rules to exchange trust assets for other types of assets of equivalent value. But if you fail to get the gift done now and lock in the benefits of the current laws, the opportunity to do so may be lost forever.

Disclaimer: This material has been prepared as a tool to assist in a general discussion of the matters herein.  These materials should not be relied upon with regard to your particular situation without an attorney being consulted. The interpretation of any laws and rulings should be independently verified by local counsel.

For more information, visit the Atlanta Bar Association

Some of our 2011 newsletters addressed the reasons why 2011 and 2012 would be the “golden gifting years.” This newsletter will focus on a relatively unknown estate planning technique which can maximize the benefits of these golden gifting years: the “Perpetual Dynasty Trust.”

One of the issues addressed by estate planning is how to move assets from the current owner to the owner’s loved ones while reducing negative consequences, including the burden of the “wealth transfer” taxes which can apply when assets move from one person to another (the gift, estate, and GST taxes). Prior to the 2010 Tax Act, the relatively low exemptions associated with the wealth transfer taxes imposed fairly tight limits on the ability to transfer significant wealth without incurring transfer taxes. As stated above, the 2010 Tax Act’s changes to the wealth transfer taxes greatly increased the exemptions, which also greatly increased the amount of assets which can be transferred during life or at death without wealth transfer taxes. However, because these changes are temporary, the only way at this time to ensure that a person and his loved ones are able to actually benefit from the increased exemptions without the person having to actually die is for the person to make lifetime gifts, effectively locking in the increased exemptions. If no lifetime gifts are made and the exemptions decrease in the future as scheduled, the opportunity to use the current high transfer tax exemptions could be lost forever.² In addition, gifts may become generally less potentially beneficial in the future as the economy recovers and asset values and interest rates rise with the recovery. As a final added incentive to make gifts now, rather than waiting until another year, the government continues to consider making various unfavorable changes to the wealth transfer tax laws, to limit the potential benefits of a number of existing strategies. For these reasons, 2012 stands out as potentially the best year ever to consider and make large lifetime gifts.

If you decide to go ahead and make gifts during 2012, there are many strategies to consider, and the strategies you select should be the ones which best fit your particular situation and goals. However, in many situations, one particular strategy, used alone or in combination with other strategies, may offer the best chance for you to maximize the benefits of your gifts for your loved ones. This strategy is the Perpetual Dynasty Trust.

In the past, each state had a law called the “Rule Against Perpetuities.” The Rule Against Perpetuities is based on very old English court cases. The Rules place fairly strict limits on the period of time for which a trust can exist, and effectively mean that a trust has to provide for its own termination every so often (generally, every 90 years or so, under the modern version of the Rule which applies in many states). Beginning in the 1990s, however, a number of states repealed or modified their Rules Against Perpetuities, resulting in the possibility for creating very long term trusts (such as ones lasting for 360 years) or truly perpetual trusts. A “Perpetual Dynasty Trust” generally means a trust which is set up in a state which has either repealed its Rule against perpetuities completely (such as Delaware, Alaska, and South Dakota) or modified its Rule so that trusts can last for hundreds of years (such as Tennessee and Florida with 360 years and Nevada with 365 years). The intent of a Perpetual Dynasty Trust is for the trust to continue as long as the law and its assets allows.

Why would you want to set up a trust which may last for hundreds of years or longer, well beyond the period of time when you will be alive? A trust can be an incredibly beneficial and protective way to transfer assets to your loved ones. A trust can allow beneficiaries to have fairly extensive control over their assets; such as holding powers of appointment, which can let the beneficiaries direct the way the assets benefit their own loved ones. At the same time, a trust can still provide protection for the assets which pass to the beneficiary – protecting the assets from a beneficiary’s creditors, the beneficiary’s spouse in the event of a divorce, predatory persons who may want to take advantage of the beneficiary, and future wealth transfer taxes. To maximize these benefits, you want the trust to have significant assets at its creation, and you want the trust to be fully exempt from the GST tax, so that there are no transfer tax consequences as the assets move from generation to generation. The current high gift and GST tax exemptions, along with the availability of very long term or truly perpetual trusts, offer an unprecedented opportunity for the creation of well-funded, fully GST tax exempt, Perpetual Dynasty Trusts.

One concern, which prevents many people from taking advantage of the ability to make tax-free wealth transfers, is this: “What if I need the money later?” Proper planned and structured Perpetual Dynasty Trusts, along with other estate planning techniques and good financial advice, can go a long way toward reducing this concern. This type of estate planning should generally include “safety valve” provisions, of which there are a number of different types. When used correctly, these safety valves can help you get assets back if and when you need them, while not preventing you from realizing the transfer tax and other benefits of making the gifts if you don’t need the assets. Your advisor should be able to explain these safety valves to you, and to help you set up a plan which lets you give assets away without feeling any significant economic or emotional discomfort as a result of the gifts.

A word of caution: since Perpetual Dynasty Trusts can last for extreme periods of time, they need to be very carefully drafted, to help ensure that they have maximum flexibility and can allow your wishes to be best carried out and potential future problems to be fixed or avoided most easily. You should include very clear statements describing your intent and desire as to how the trust should be used and managed, and as to the kind of benefits you want it to provide for your loved ones. These are not “off-the-shelf” documents, and should only be prepared by sophisticated, experienced, estate planning attorneys after extensive consultation.

At Morgan & DiSalvo, we have focused for many years on helping our clients transfer their wealth to their loved ones efficiently and effectively, with flexible and sophisticated planning and lots of safety valves. If you would like to learn more about the opportunities presented by the remainder of the golden gifting year 2012, and how you may be able to take advantage of a Perpetual Dynasty Trust or other planning, please contact us at (678) 720-0750 or sollila@morgandisalvo.com to schedule an appointment to talk to either Richard Morgan or Loraine DiSalvo. Remember, time is limited, and the sooner you begin planning, the better.

Disclaimer: This material has been prepared as a tool to assist in a general discussion of the matters discussed herein. These materials should not be relied upon without an attorney being consulted with regard to your particular situation. The interpretation of any laws and rulings should be independently verified by local counsel.

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1 The gift and estate taxes actually do not have an exemption. Instead, a “unified credit” exists against gift and estate taxes. This unified credit is a tax credit which applies against gift and estate taxes which would otherwise be due on lifetime gifts and transfers at death. The credit effectively exempts an amount of assets from gift and estate taxes: currently, the effectively exempted amount is $5,120,000. The effective exemption is referred to in the gift and estate tax statutes as the “basic exclusion amount.” The GST tax does have an “exemption.” For 2012, the GST tax exemption is set at the value of the gift and estate tax basic exclusion amount. For purposes of convenience, this newsletter will generally refer to both the gift and estate tax basic exclusion amount and the GST tax exemption as “exemptions.”

2 After the 2010 Tax Act, many people raised the question of whether there could be a “recapture” or “clawback” at death of taxable gifts made during life under a high exemption if the gift and estate tax exemptions do drop in the future. However, this should not happen. The gift and estate tax “exemption” (referred to by the statutes as the “basic exclusion amount”) is actually not a true exemption or exclusion, but is actually the result of a credit against gift or estate taxes which is given to U.S. citizens and U.S. permanent residents under the wealth transfer tax laws. Gift taxes, which were actually paid by the deceased person during his lifetime, are added to the value of the estate tax credit applied on the person’s estate tax return. The fear of a “clawback” arose because taxable gifts made during a person’s lifetime are added to the value of the person’s gross estate for estate tax purposes at the person’s death. The thought was that, if gifts made under a larger gift tax exemption were added to an estate, and the smaller estate tax exemption were then applied, there would be no offset for the value of the gifts transferred under the lifetime gift tax exemption. However, the actual result should be as follows: if the credit against gift taxes was higher at the time taxable gifts were made than the estate tax credit which exists at the time of the person’s death, the “excess” credit (the amount by which the gift tax credit at the time of the taxable gifts exceeds the value of the estate tax credit at death) will be effectively treated for estate tax purposes as if the person actually paid the gift taxes. This resulting in the person’s estate taxes effectively being calculated as payable only on the amount actually being transferred at death, with no additional amount generated by the past “excess” taxable gifts.

• What planning steps should our clients be taking now?
• What changes should be made to wills and trusts?
• How should the $5.12 million gift and GST tax exemptions be used?

What is your true estate planning intent?

In the fairly recent past, many people focused primarily on three goals when developing their estate plans: (1) reducing the impact of the wealth transfer taxes – the gift, estate, and generation-skipping transfer (“GST”) taxes, (2) ensuring that a surviving spouse was provided for, and (3) ensuring that any remaining assets were divided among other beneficiaries (loved ones and/or charities) in specific shares. The wealth transfer tax exemptions were relatively low, and each state had its own version of an ancient law called the “Rule Against Perpetuities.” The low wealth transfer tax exemptions tended to reduce the amount of assets which could easily be passed in trust for multiple generations without negative tax consequences. The Rules Against Perpetuities also generally prevented trusts from benefitting more than a few different generations of beneficiaries, by limiting the period for which trusts could exist. For these reasons, most estate plans tended to use trusts in very limited ways, and the trusts were often designed to last for a fairly short period of time before the assets would be distributed outright to the trusts’ beneficiaries. Many people never thought much about their non-economic goals and desires for their families, in part because the short-term nature of the trusts used in their plans meant that their ability to have the trust administration truly reflect their desires would be correspondingly short-lived.

However, in the past couple of decades, a number of legal changes have made long-term trust planning both more possible and more attractive for many people. Many states have changed their laws to either significantly amend or abolish their Rules Against Perpetuities. These states now allow very-long-term trusts, from ones which will last for hundreds of years to those that may be truly perpetual. These long term trusts are often referred to as “dynasty trusts.” In addition, the gift, estate, and GST tax exemptions have skyrocketed in the past few years: for example, the estate tax exemption was $625,000 in 1997, it was gradually increased over time, reaching $3,500,000 for 2009, and then recently increased to $5,000,000 for 2011 and 2012. The gift tax exemption and GST tax exemptions are also currently $5,000,000 each – much higher than they have ever been. The combination of these changes to the Rules Against Perpetuities and the wealth transfer tax laws means that people who wish to create very-long-term trusts can now do so much more easily.

In addition to the changes in the laws regarding trust period limitations and wealth transfer taxes, more and more people are becoming aware that trusts, unlike outright gifts or inheritances, can offer a number of benefits beyond just the economic value of the trust’s assets. These benefits can include protecting the trust’s assets from a beneficiary’s spouse in a divorce, from the beneficiary’s creditors, and from predators who could try to take advantage of the beneficiary. The trust can also prevent its assets from being included as part of the beneficiary’s own assets for wealth transfer tax purposes and, sometimes, for other purposes as well, such as determining eligibility for Medicaid or other needs-tested benefits. Trusts can also incorporate provisions designed to encourage beneficiaries to engage in certain behaviors the trust’s creator views as positive, such as getting a college degree, getting married, having children, or engaging in charitable activities, and discourage behaviors the trust’s creator views as negative, such as dropping out of school, refusing to work or be productive, abusing drugs or alcohol, or getting involved in criminal activity. This type of trust is generally referred to as an “incentive trust.”

As a result of both fairly recent legal changes and increased awareness of how beneficial trusts can be, more and more people are beginning to use very-long-term trusts as an integral part of their estate plans. Long term trusts create both an opportunity for trust creators to have their values and goals reflected in the way their assets are used and managed for an extended period. They also create a strong need for clear, well-considered statements of the trust creator’s goals and desires regarding how the trust should be managed and used. A clear statement of the trust creator’s intent is especially important for long-term trusts since the trustee will need to interpret and apply this intent for tens, hundreds, or possibly even thousands of years into the future.

In developing your own estate plan, especially if you intend to use a long-term trust or an incentive trust as part of the plan, you should consider questions such as:

1. Is the trust intended to primarily benefit one person during his or her lifetime, such as a surviving spouse or a child? If so, what benefits, if any, should be provided to others whose lives may be involved with the primary beneficiary’s life, such as the primary beneficiary’s spouse or children? What about others who may someday depend on the beneficiary, such as elderly parents or in-laws, or a niece or nephew for whom the beneficiary becomes responsible?
2. If the trust has multiple current beneficiaries (ones who can receive benefits now, rather than having to wait until after other beneficiaries’ interests have ended), should certain beneficiaries (or groups of beneficiaries) be favored over others, or should all beneficiaries be treated equally?
3. Should one or more of the beneficiaries of a trust be given practical access to and control over some or all the trust’s assets? Do you want a beneficiary to be able to serve as his or her own Trustee, or as a Co-Trustee along with another party?
4. Should the Trustee be able to use assets for one or more beneficiaries as needed even if it means that the trust’s assets will be used up and there will be nothing left for successor or contingent beneficiaries?
5. Do you want trust assets to be the beneficiary’s primary source of support, or to serve primarily as a “safety net” or source of supplemental funds to help the beneficiary accomplish his or her educational, business, and family goals?
6. Do you want the beneficiaries to have a particular standard of living, even if the trust’s assets may end up being depleted to maintain that standard during periods of low investment returns, or should a given beneficiary’s standard of living be secondary to the goal of ensuring that the trust’s assets last over a long period, even if that means the beneficiary’s customary standard of living may not be fully supported by the trust at certain times?
7. Are you concerned about a large trust fund negatively affecting the beneficiary’s desire to work or otherwise be productive? What information should a beneficiary be entitled to receive regarding the trust? Do you want to include incentive trust provisions to encourage or discourage certain behaviors?
8. Is it important to you that your assets be used for certain purposes or to accomplish certain goals? Are there purposes for which you do not want your assets used under any circumstances?
9. Do you have charitable goals or a desire to create significant charitable benefits? Do you want your loved ones to be involved in philanthropic activities? How do you want to address your charitable goals or desires?
10. What messages regarding life, family, religion, charity, and other matters of substance do you wish to pass on? What legacy do you wish to leave behind? How do you want those who knew you to remember you? What impression do you want to make on others who never knew you, but who will be part of your legacy?

Your answers to these sorts of questions, and the extent to which those answers affect your estate plan, will be completely personal to you. If, when considering these types of questions, you discover that you really care about the answers, then you should ensure that your estate planning documents take your desires and concerns into account. Estate planning which truly and accurately reflects your intent will generally result in a fairly complex plan with complex documents. These plans may also involve a good deal more time, thought, effort, and cost than the less-intent-focused planning of the past. However, the rewards of true intent-focused estate planning, both to you and your intended beneficiaries, can be worth much more than the time, effort, and costs incurred. A plan which accurately reflects your true intent allows you to be sure that you will leave your truly desired legacy to your loved ones and community.

Do you want to get started on an estate plan which will truly reflect your intent and ensure you leave the legacy you really want to leave? Contact us at (678) 720-0750 or sollila@morgandisalvo.com to set up an estate planning consultation with either Richard Morgan or Loraine DiSalvo. You can discuss your planning intent and find out what benefits a plan which incorporates your intent can offer you and your loved ones. We look forward to helping you with these important matters.

The 2010 Tax Act gave us a federal gift tax exemption of $5 million per person, along with a federal GST tax exemption of $5 million per person and a federal estate tax exemption of $5 million per person. These exemptions alone represent a major change from prior years: in 2009, the estate and GST tax exemptions were $3.5 million each and the gift tax exemption was a mere $1 million, and these amounts were even lower for years before 2009. However, the 2010 Tax Act’s changes to the gift, GST, and estate tax exemptions are scheduled to expire at the end of 2012, and there is no guarantee that the laws will be changed to keep these high exemption amounts in effect past December 31, 2012. Just by combining these high exemption amounts with various estate planning techniques and the generally low asset values, we can help our clients reduce their potential estate and gift tax exposures while also helping protect their assets from creditors and predators. Many estate planning techniques, however, rely on a set of federally-determined interest rates, which include the “Applicable Federal Rate” (“AFR”) (which is actually a set of rates which apply to different situations) and a special rate generally referred to as the “Section 7520 Rate.” As of October 1, 2011, the AFRs and the Section 7520 rate will hit the lowest levels ever previously seen. As estate planners, all we could think when we saw the October 2011 rates was “Wow!”

For loans and promissory notes, you must use an interest rate no lower than the appropriate AFR. For October 2011, the AFRs range from 0.16%, which applies to short-term loans (which have terms of 3 years or less), 1.19% for mid-term loans (which have terms lasting between 3 and 9 years), to 2.91% – 2.95% for long-term loans (which have terms lasting longer than 9 years). For certain planning strategies defined by statutes, such as Grantor Retained Annuity Trusts (“GRATs”) and Charitable Lead Annuity Trusts (“CLATs”) and some others, you must use the Section 7520 rate, which will be 1.4% for October 2011. The lowest Section 7520 rate previously seen was 2.0%.

The reason that low AFRs and a low Section 7520 Rate are important is that these rates effectively set the minimum amount of return on investment that you have to recognize on assets used in an estate planning technique before you will realize any of the desired gift, GST, and estate tax benefits. This rate is often referred to as the “hurdle rate.” For example, if you wanted to transfer assets to a trust you created for the benefit of your loved ones without making a large, taxable gift, you could loan $1 million to the trust, using a properly structured promissory note. The loan could have a nine-year term, which is considered a mid-term loan. In order to help avoid negative income tax and gift tax consequences, the loan would have to bear interest at a rate which is no lower than the AFR for a mid-term loan. Since the current AFR for a mid-term loan made in October 2011 is a mere 1.19%, you only need to beat this hurdle rate of return for the transaction to be successful. This means that, if the trust can earn a greater than 1.19% return on the assets you loan to it, the trust can use some of its returns to pay back the loan and accumulate the excess amount. This can allow the trust to keep the net profit sheltered from estate taxes and, with proper planning, from GST taxes, for your loved ones’ benefit. In addition, and especially if the trust already holds other assets as a result of previous transactions, you may be able to accomplish this transfer of wealth without using any of your available gift tax exemption.

As another example of how the ultra-low federal rates for October 2011 can produce amazing benefits, let’s assume you have a closely held business that you would like to eventually pass on to family members. However, you have been reluctant to begin transferring interests in the business due to the complications and potential tax burdens involved, and because you would still like to retain access to the wealth which the business represents. Under the current, very low rates, you can transfer smaller interests in the business as gifts, using either annual exclusion gifts or, if larger gifts are desirable, you can make taxable gifts and use some of your $5 million gift tax exemption. You can then sell an additional interest in the business in exchange for a promissory note which bears interest at the appropriate AFR. As long as the business returns more than the necessary AFR in earnings and appreciation, the purchaser comes out ahead, and you should be successful in moving future appreciation on the transferred business interest out of your estate from a gift, GST, and estate tax perspective. You can also feel more comfortable than you might with a straight gift of the entire transferred interest, since you will receive assets in exchange for the sold portion.

For those who would like to take advantage of the current, incredible, opportunities but aren’t sure they feel comfortable shifting significant assets out of their direct control, there are many techniques which can help reduce the pain of transferring assets and ensure that, if needed, assets may still be available. You need estate planning attorneys who are well-versed in tax and estate planning, and who have the skill and knowledge necessary to make sure that transactions work as intended to accomplish your goals while maintaining as much flexibility as possible. At Morgan & DiSalvo, we have spent our careers and tremendous amounts of time working to develop a deep and detailed knowledge of the relevant law and concepts. Our goal is to offer our clients whatever level of planning they want and need, whether the goals are simple or the needed techniques are complex, creative, and cutting edge.

Would you like to consider taking advantage of this incredible window of opportunity, or do you know someone who might? Call us at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule an estate planning consultation with either Richard Morgan or Loraine DiSalvo. We can discuss your questions and determine what might be the best fit for you. But hurry – the window of opportunity is closing fast.

Richard recently gave a speech at the 2011 Fiduciary Law Institute on important planning under the temporary 2010 Tax Act. While this speech was given primarily to other estate planning attorneys at this prestigious Georgia Institute, we felt that our friends may like to see the video clips as they address some of the topics addressed in our recent newsletters, including:

1. While it is too late to undertake any 2010 transactions, our clients who made transfers in 2010 or whose family members passed away in 2010 may have steps to take to deal with or maximize their benefit under the 2010 Tax Act. Watch this video on Completed 2010 Gifting Issues.
2. Huge planning opportunities exist related to the increase in the gift tax exemption to $5 million until the end of 2012. This is a window of opportunity that should at least be considered and not ignored. Watch these videos on:
   • Exemption/Rate & Gifting Benefits
   • Types of Gifts to Make
   • Caveats to Gifting
   • Financial Insecurity – the Elephant in the Room

These videos cover the issues for those that already made gift transfers during 2010. For individuals considering making significant gifts prior to the end of 2012, these videos include the pros and cons and dealing with the biggest issue: possible financial insecurity concerns to making these type gifts.

We hope that you find them helpful and as always will feel comfortable contacting us with your questions and concerns. Enjoy the videos.

The site is divided into five tabbed sections—Wills & Estate Planning, Probate & Administration, Tax Planning, Business Succession and Charitable Gifts. Each section provides information about Morgan and DiSalvo’s services within that area of need, as well as helpful articles and advice that will assist you and your family with some of the most important decisions you will ever make.

On the site, you will also find a link called News and Articles, which brings all of the information on our site together into a “digital library” you can browse at your leisure. We’ve even included a few “podcasts” for those who like audio format. We hope you’ll enjoy the information we have collected and find it useful.

Please feel free to give us feedback about anything you would like to see in the coming months. This new site was created with you and your needs in mind, so we look forward to hearing your thoughts.

Until we have the pleasure of serving you again, we hope you have a sparkling Fourth of July and a wonderful summer!