Giving Gifts to Lower Your Estate Taxes

If the estate tax comes back with a vengeance next year, people will need to transfer more assets to family members during life instead of after. Here are some ways to do so:

1. Lend Money. If you lend money to family members, you have to charge the AFR, which is less than they’d have to pay a bank and more than you’d earn from CDs or money market accounts. Thus, family loans are a win-win situation.
2. Sell Assets. You can sell assets to your family members. If you use a grantor trust, you pay tax on the trust’s income without it being considered a gift to the beneficiaries. Further, assets in the trust appreciate without being depleted by taxes.
3. Set up New GRATs. It is currently possible to form a zeroed-out GRAT, which allows you to save your lifetime gift tax exemption because the remainder is theoretically worth nothing. However, the future of zeroed-out GRATs is uncertain.
4. Revisit Existing GRATs. If asset values have declined in your current GRAT, you may want to move the assets into a new GRAT, taking advantage of lower rates. This transaction would not generate additional capital gains or income.
5. Benefit Charity, Then Family. The more money that goes to charity through the use of a charitable lead annuity trust, the less the gift tax you will have to pay on the remainder that goes to your family members.

See Deborah L. Jacobs, Five Ways to Freeze Out Uncle Sam, Forbes, Aug. 25, 2010.