June Letter from Mike

On January 1, 2013 (just 6 months from now), the estate tax and the gift tax exclusion is scheduled to be reduced from $5,120,000 to $1,000,000 per person.  That’s a decrease in the amount of property excluded from gift and estate tax of over 80%.  We are looking at  an increase in the estate tax rates from 35% to 55%, an increase of over 57%.

These tax changes are among the most significant that we will see in our lifetimes.  The potential effects on the number of people subject to a death tax and the amount of family wealth that will be transferred to the Federal Government is staggering.

Of course, we do not have a crystal ball.   We don’t know what the tax laws will be for sure next year, nor do we know what the situations will be 10 or 20 years from now.

What we do know is that for the last 18 months we have had a gift tax exclusion of  $5,000,000.  It jumped from $1,000,000 to $5,000,000 as a result of the mid-term elections and President Obama caving into Congressional pressure to reach a tax compromise in December of 2010.  There is a lot of “truth” to Professor James Casner’s statement to the House Ways and  Means Committee back in 1976,

“In fact, we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”

What did he mean?  Those who properly and prudently plan, can all but eliminate gift and estate taxes.  Now it may mean that you have to start early in gifting property to your loved ones, but through proper planning and techniques, you may be able to retain almost complete control over the property conveyed.  It may mean that you’ll have to consider  whether you would like certain charitable organizations to spend your hard earned wealth, rather than the Federal Government.  This certainly is the choice of many well publicized billionaires, such as Warren Buffett and Bill Gates.  They are convinced that their charities can spend their money better than Congress and the President.

Gifting in 2012, for those who are able, is more attractive than ever before. The $5,120,000 personal exemption ($10,240,000 per couple) is scheduled to go away at December 31, 2012.  Therefore, there is a “use it or loose it” mentality.

We are coming out of one of the worst recessions since the Great Depression.  This has led to extremely low valuations on real estate and closely held business assets, which enhance the amount of property that can be given away through the use of exemptions and annual exclusions.

While the IRS has been attacking the use of valuation discounting, and lobbying for its elimination through  new legislation,  the ability to take advantage of marketability discounts and lack of control discounts generally reduces the value of property being gifted up to a third.

We are witnessing historically low interest rates.  In fact, the IRS published rate for June is a mere 1.2% (June’s mid-term rates are all 1.07%).  These low interest rates are very favorable for many estate planning techniques which are used in conjunction with gifting strategies.  These include grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), and Sales to Defective Grantor Trusts.

All these favorable reasons for gifting, with the backdrop of rising taxes as soon as six months away from now, makes 2012 the opportune time to consider gifting.  Such planning takes time and analysis to do it right.  Therefore, it should not be left to the last minute.


Michael W. Hoffman


If you have any questions regarding this letter, please contact Hoffman & Associates at 404-255-7400

Charitable Lead Annuity Trust (CLAT)

Current economic conditions have presented intriguing options for charitably oriented individuals looking to transfer wealth tax free. A Charitable Lead Annuity Trust (CLAT) is an alternative trust structure that transfers wealth free of gift tax to an heir and a charity. In a CLAT the donor creates a charitable trust that pays an annuity to the charity and at the end of the trust the principal often transfers to the heirs. The CLAT benefits from the historically low IRS discount rate (now hovering at around 1.4%) which makes it possible to avoid gift taxes when transferring assets remaining in the trust at its termination. For a CLAT to function properly it is important that the assets in the trust have an expected appreciation value greater than the hurdle of the IRS discount rate. Fortunately, the extremely low hurdle in place now vastly widens the pool of feasible favorable asset options.

The tax law on CLATs opens a window of opportunity that is particularly appealing in today’s economy. Tax law dictates that all payment amounts be known at the creation of the CLAT; however, the payment amounts do not need to be the same. A “Shark-Fin” CLAT takes advantage of this nuance of law by making minimal payments throughout the trust’s life and in the last year makes a balloon payment large enough to cover the amount necessary for the trust to earn a 100% gift tax deduction according to the IRS discount rate. By allowing the trust to grow rapidly through the small payments in the trust’s life, the large balloon payment is made possible as long as the trust achieves the discount rate. Anything made in excess of the low discount rate is passed to the heirs free of gift tax. The Shark-Fin strategy hedges against the possibility of poor investment results in the initial years of the trust and anticipates more favorable investment results in the long term. A Shark-Fin CLAT is particularly appealing when the economy is sluggish because it compounds the benefits of both the current low IRS discount rates and the long term prospect of economic recovery.

The negatives of a Shark-Fin CLAT are mostly shouldered by the charity. A charity is most likely going to want the steady flow of sizable payments rather than one large payment at the end of the trust, especially since the charity will be receiving the same amount whether a Shark-Fin CLAT or a normal CLAT is used. Also, time-value of money makes the wealth received from a Shark-Fin CLAT less valuable to the charity than an equal amount received through a normal CLAT. Another negative is the income tax under a Shark-Fin CLAT is likely to be greater. The trust is taxed on earned income in excess of the distributions and since the distributions to the charity are small in every year except the last, the deduction amount offsetting the tax is very small.

For more information on CLATs, please contact Hoffman & Associates at 404-255-7400