Wealth Management Update (November 2013)

Federal Exclusion from Gift, Estate and Generation-Skipping Transfer Taxes Increases to $5,340,000 in 2014

In Revenue Ruling 2013-35, the IRS announced certain inflation adjustments to tax exemptions and deductions. The IRS increased the basic exclusion amount for 2014 to $5,340,000 from $5,250,000. Decedent estates in 2014 will pay no federal estate tax if their taxable estate is under $5,340,000 and they did not use any of this exemption during their lifetime. Additionally, the basic exclusion amount is the amount that an individual may use to make tax-free gifts during his or her lifetime. Any exemption amounts used during life reduce the exemption amount available at death. Furthermore, the basic exclusion amount also determines the amount that may pass free of generation-skipping transfer taxes, which therefore also increases to $5,340,000.

The amount of the annual exclusion for gifts to U.S. citizens remains at $14,000 for 2014. This means that an individual may gift up to $14,000, per beneficiary, next year without reducing such individual's basic exclusion amount or being subject to gift tax. However, if the recipient of the gift is a spouse who is a non-U.S. citizen, the U.S. citizen spouse may gift up to $145,000 (increased from $143,000 this year) to the non-citizen spouse next year without including the amount in his or her taxable gifts. Comparatively, a married U.S. citizen couple may make unlimited gifts to each other without being subject to gift tax.

November Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts

The November § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.0%. This is down from October's 2.4% rate. The applicable federal rate ("AFR") for use with a sale to a defective grantor trust, self-canceling installment note ("SCIN") or intra-family loan with a note of a 9-year duration (the mid-term rate, compounded annually) is down from October's rate to 1.73%. Remember that lower rates work best with GRATs, CLATs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans. The combination of a low § 7520 rate with financial and real estate markets that remain undervalued presents a potentially rewarding opportunity to fund GRATs in November with depressed assets you expect to perform better in the coming years.

Clients also should continue to consider "refinancing" existing...