There is a federal estate tax in the United States, and it can significantly alter the financial future of your family if you are forced to pay it. This tax carries a robust 40 percent maximum rate, so this is a significant portion of your wealth.
The estate tax is potentially applicable on asset transfers that exceed $5.43 million in value. This is the 2015 figure, but there are annual adjustments to account for inflation.
We also have a federal gift tax that is unified with the estate tax that is in place to prevent people from giving gifts to avoid the estate tax. This exclusion is a unified exclusion that applies to lifetime gift giving and postmortem asset transfers.
Our office is in Grand Forks, North Dakota. In our area, there are a lot of farmers and ranchers. When you are tallying up your assets with estate tax exposure in mind, you have to include your real property. There are farmers and ranchers who are cash poor, but land rich as it were, so you could be exposed even if you do not consider yourself to be extraordinarily wealthy.
Fortunately, there are estate tax efficiency strategies that can be implemented. If you are in possession of assets that you would expect to appreciate significantly in the coming years, and you are facing estate tax exposure, you could consider the creation of a grantor retained annuity trust or GRAT.
To execute this strategy, you convey highly appreciable assets into the trust. You decide on a trust term, and you receive annuity payments from the trust over this interim. In the trust declaration, you name a beneficiary who would assume ownership of the remainder that may exist after the expiration of the term.
Since a gift may be given to a beneficiary, the Internal Revenue Service applies an estimate of the interest accrual when it is determining the taxable value of the trust. They use the hurdle rate, which is 120 percent of the federal midterm rate.
When you set up the trust, you endeavor to “zero it out.” To do this, you take annuity payments that equal the entire taxable value of the trust.
Interest rates have been low for numerous years at this point, so the assets in the trust could outperform the hurdle rate that was applied by the Internal Revenue Service. If this takes place, there will be a remainder in the trust after the expiration of the term, even though you took the entire taxable value of the trust in annuity payments.
The beneficiary would inherit any remainder that may exist gift tax-free.
Our Firm Can Help
If you would like to discuss the zeroed out GRAT or any other tax efficiency strategy with a licensed professional, send us a message through the following link to set up a no obligation case evaluation: Grand Forks ND Estate Planning Attorneys.