TO:                        Estate Planning Clients

DATE:                    February, 2009

RE:                        Estate Planning Opportunities in the Current Financial Environment


       Few, if any, of us have been untouched by the current downturn in the economy. While the economy is not showing any signs of a rapid recovery, this economic lull presents many planning opportunities. Also, the beginning of a new administration means that changes are coming to the estate tax laws, making it a good time to re-evaluate your current planning. The following factors have combined to offer a prime environment for incorporating lifetime wealth transfers into your planning.

       1.        Applicable Exemption. As of January 1, 2009, the estate tax exemption increased to $3.5 million, while the gift tax lifetime exemption remained at $1 million. In general terms, this means that a person could die with $3.5 million in his or her estate this year and owe no federal estate taxes. However, to the extent that the $1 million gift tax exemption has been used to offset any gift tax liability that a person has incurred as a result of lifetime gifts, the estate tax exemption would be reduced. While the lifetime exemption of $1 million would decrease the applicable exemption available at death, the utilization of the lifetime exemption can result in a decrease in the value of the assets to be included in a person's estate.

       2.        Annual Exclusion Increase. The new year also brought us an increase in the gift tax annual exclusion from $12,000 in 2008 to $13,000 in 2009. This is a perfect time to make sure that you are not wasting any of the available annual exclusion. For example, a married couple with two children and four grandchildren would have wasted the opportunity to transfer tax-free an additional $12,000 (two spouses x six family members x $1,000 difference) by not increasing the amount of gifts made to their family members this year.

       3.       Capital Gains and Dividend Rates. Long-term capital gains and qualified dividend tax rates remain at 15%. Subject to any action by Congress or the new administration, these low rates are scheduled to expire on December 31, 2010.

       4.       Low Interest Rates. Interest rates are currently the lowest they have been in decades. With applicable federal rates ("AFRs") as low as 0.60% and not exceeding 2.96%, now is the prime time to leverage your assets and transfer wealth to the next generation.

       5.       Depressed Property and Stock Values. The stock market is down more than 42% since its high in October 2007. While not to the same extent as many areas in the country, we have also seen our real property values decline over the last couple of years. This reduction could mean that it is an excellent time to transfer property that currently has a depressed value but may increase in value as the economy recovers. A transfer would remove the appreciation from your estate and could lessen your exposure to transfer taxes.

       6.       Changes to Current Laws. The attached Summary of H.R. Bill 436 presents one of the proposed changes to the current estate tax and valuation laws. This bill, or something close to it, reflects the changes that may be enacted this year. Because this bill becomes effective as soon as it is enacted, it is important that you currently evaluate making any changes to your planning (especially for any transfers of nonbusiness assets, as explained in the enclosed summary).

The next planning issue involves what techniques can be used to take advantage of the present situation. Based on the above factors, we believe the current time is a prime environment to consider making a transfer to a grantor retained annuity trust ("GRAT"), making a sale to an intentionally defective grantor trust ("IDGT"), or implementing other similar strategies.

       1.       Grantor Retained Annuity Trusts. A GRAT is an irrevocable trust in which the grantor transfers property and retains an annuity stream for a specified period of time. At the end of the trust term, the remaining trust principal could be distributed outright to the grantor's children or retained in trust for the benefit of the grantor's spouse and children, which would allow some access to the trust property during the spouse's life.

       A GRAT is used as a means to pass anticipated appreciation in assets to the grantor's descendants for minimal gift tax cost. This strategy is achieved if the total investment return is in excess of the § 7520 Rate (currently 2.0% for February) over the term of the trust. The success of a GRAT is also dependent upon the grantor outliving the trust term. If the grantor survives the trust term, he or she will cease to have an interest in the trust assets, thus removing the assets from his or her gross estate and vesting the remainder interest in the remainder beneficiaries without further gift or any estate tax. However, if the grantor dies during the trust term, all or a portion of the trust property will be included in the grantor's estate. Accordingly, the structuring of a GRAT should balance the desire to limit the value of the gift (i.e., decrease the taxable gift) from the grantor by either extending the term of the GRAT or increasing the current payout to the grantor, against the risk that the grantor will die before the expiration of such term.

       2.       Installment Sale to an Intentionally Defective Grantor Trust. Instead of, or in addition to, establishing a GRAT, the grantor could sell the property to an IDGT in return for an installment note. An IDGT is a trust which is considered owned by the grantor for income tax purposes but not for estate tax purposes. If the grantor is treated as the owner for income tax purposes, he or she would be responsible for the income tax liability of the trust regardless of whether such income is distributed to him or her. In addition, transactions between the grantor and the trust are not taxable events for income tax purposes.

        For example, if the grantor sells appreciated property to the trust, gain is not recognized by the grantor and the trust does not acquire a cost basis. Moreover, if the grantor sells the property to the trust in return for an installment note, the grantor does not recognize interest income and the trust is not allowed an interest deduction. Accordingly, this structure allows the grantor to sell property for its fair market value, thereby freezing the value of the property in the grantor's estate, except for the interest on the note, without recognizing gain on the sale. In addition, there are no requirements of annual principal payments as with a GRAT. As a result, the note issued by the IDGT could be structured to require only annual interest payments with a balloon payment at the end. Although the trust assets will not be included in the grantor's gross estate, the unpaid balance of the note will be included.

        An Additional Consideration: Basis. One issue that should be taken into consideration when deciding whether to make a lifetime transfer is the income tax basis of the property. If a person transfers property during his or her lifetime, the transferee receives the transferor's basis in the property. This means that any gains that are built in to the property will be taxed to the transferee when he or she later sells the property. For example, if A gives B property that A purchased for $100 and that is now valued at $500, when B sells the property the next day, B would have a $400 taxable gain. On the other hand, if property passes to a transferee upon the death of the transferor by will or in trust, then the property receives a "stepped-up" or "stepped-down" income tax basis equal to the value on the transferor's date of death. Continuing the example, if A had died and the property passed to B under A's will, B would take a $500 basis in the property. When B then sells the property the next day, B would have no taxable gain. This basis step-up can be a considerable advantage to transferring property at death rather than during life.

        If you have any questions about GRATs, IDGTs, or any other planning opportunities, please do not hesitate to contact us. We encourage you to review your planning possibilities in the near future in order to take advantage of the current economic climate before the law changes.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.