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Transferring appreciation.

Estate planning techniques have traditionally focused on preparing for the eventual disposition of estate assets upon death, disability, or retirement. However, with the impact of inflation and the rapid growth of many estate assets, particularly business interests, effective planning should also include consideration of a lifetime transfer of these interests to children or other heirs. (1)

When adopting one or more of these estate freezing techniques, the objective is to create a freeze line beyond which future appreciation is transferred to another. By this means substantial value can sometimes be transferred to the next generation without being subject to estate taxes. (2)

The most popular of these techniques includes: installment sales where an asset is sold today in return for an income stream payable over a specified number of years; private annuities where property is sold in return for a promise to pay a periodic income for life; gifts of appreciating assets; intentionally defective trusts followed by gifts and installment sales; family partnerships which allow children to share in the partnership's growth and profits; recapitalizations followed by a gift of common stock; family holding companies which are similar to partnerships; grantor retained income, annuity and unitrusts, where a grantor places property in trust but retains rights to payments; and remainder interest transactions which involve the current sale of a future interest in property.

However, to take advantage of any of these techniques the transfers must take place prior to the appreciation. This often means that it is up to the client's advisors to motivate him to take actions that will not produce tax savings until many years in the future.



* Installment Sales                           50-53, 446
* Private Annuities                           50-53, 496
* Gifts                                            54-61
* Intentionally Defective Trusts                   78-81
* Family Limited Partnerships               178-179, 483
* Recapitalizations                              182-185
* Family Holding Companies                           429
* Grantor Retained Income Trusts (GRITs)             437
* Grantor Retained Annuity Trusts (GRATs)     70-73, 437
* Grantor Retained Unitrusts (GRUTs)                 437
* Remainder Interest Transactions (RITs)             516

(1) When an estate freezing technique culminates in the sale of a business interest, or other estate asset, the value represented by that interest is replaced in the estate by either the proceeds of the sale, or the obligation of the purchaser, both of which are estate assets subject to taxation. Likewise, if there is a giving of a substantial interest, use of the available unified credit means that it effectively cannot again be used at death. In either case, the sale or giving of an asset generally shifts only future appreciation out of an estate. However, exceptions to this general rule are valuation discounts, private annuities, and "present interest" gifts. See the chart on page 55, entitled Gifts & Split-Gifts.

(2) The impact of the special valuation provisions of Chapter 14 should be carefully evaluated when considering the transferring of estate assets. In this regard, see the discussion of estate freezes on pages 424-425. Also, see pages 96-97 for the impact of appreciation on estate taxes and page 114 for the value of making annual gifts.
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Title Annotation:ESTATE PLANNING
Author:Cady, Donald F.
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
Previous Article:Generation-skipping transfers.
Next Article:Installment sale & private annuity.

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