Alabama Residents Prepare for Possible Estate-Planning Changes: Part II

As a follow up to our last post, we now continue discussing the possible estate-planning changes contained in the President’s recent budget proposal.

• The low-risk grantor retained annuity trust or GRAT

This estate-planning tool permits someone to put assets into an irrevocable trust and retain the right to receive distributions for the life of the trust. The annuity is equal to the value of what’s been contributed plus interest.

For the moment, it is possible to form what’s called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift. The President’s proposal would do away with zeroed-out GRATs. It would also require that a GRAT have a minimum term of 10 years, compared with the current two-year minimum.

Obama’s proposal would greatly increase the “mortality risk” of a GRAT. This exists when the grantor dies during the trust term and all or part of the trust assets are then included in her estate for estate tax purposes. The current two-year window is shorter than the President’s proposal and offers less chance of a person dying during the term of the trust.

• Using family entities to achieve discounts

Some people use closely held enterprises, such as family limited partnerships, or FLPs, and limited liability companies, or LLCs, to discount assets before transferring them to family members or their trusts.

These family entities work when one family member puts assets into the entity, typically an FLP though on occasion a LLC. The individual then sells or gives away shares in the entity that holds the assets but not the assets themselves. Since these shares cannot be easily sold outside the family, their value is discounted due to this lack of marketability and lack of control, usually by as much as 20 or 30%. Reducing the value of the shares enables you to minimize the tax cost of transferring these assets to future generations.

The President is seeking to scale back the use of these valuation discounts, though just how he will do that is not entirely clear. Whatever restrictions are rolled out will apply retroactively to October 8, 1990.

For years now constantly changing estate tax rates and the political battles surrounding them have left many taxpayers unable to securely plan for the future transfer of their assets. An experienced Alabama estate planning attorney can help make sense out of a constantly changing legal atmosphere. The expertise of the estate planning lawyers at Martinson & Beason, P.C. will help you craft a sound plan to secure your family’s future.

Source: “Obama Declares War On Rich Folks And Wealth Advisors,” by Deborah Jacobs, published at