Estate planning will require more time and attention this year. Congress’ efforts to
permanently eliminate the estate tax failed in 2006, intensifying the need for
wealth holders to craft sound estate plans without the hope of repeal. The
estate tax is currently structured to zero out in 2010, but return with a
vengeance in 2011, with a 55 percent tax on assets above $1 million. In 2007,
legislative debate will shift away from seeking outright revocation to reducing
exemptions and estate tax rates, according to Jonathan Forster, co-managing
partner with the law firm of Greenberg Traurig in McClean, Va.
 While the estate tax remains a powerful philanthropic driver in
the United States, lawmakers are cracking down on nonprofit abuses, making
large-scale donors justifiably nervous. Senator Charles Grassley (R-Iowa) and
his Finance Committee will continue to fight perceived abuses and self-dealing
in 2007. He seems determined to hold benefactors and even nonprofit board
members personally responsible for misdeeds within an organization, such that if
a foundation employee is caught misusing charity funds, a benefactor could face
steep fines. Alternatively, under Grassley’s watch, if a philanthropist donates
assets to her child’s private school or college, the IRS might deem her or
someone related to her to have received a personal benefit and disallow the tax
deduction for the gift, plus impose penalties on the donor.
To mitigate an estate tax hit, use short-term grantor retained
annuity trusts (GRATs) to capture estate tax-free gains, according to Rob
Elliott, senior managing director with Bessemer Trust in New York. Although
GRATs are best-used during periods of rock-bottom interest rates, Elliott finds
that short-term GRATs—with life spans of one or two years—increase the
likelihood that a trust’s gains will beat a hurdle set by the IRS when a trust
is created. Investors can transfer any profits over the IRS hurdle into their
estate, free of taxes. By rolling over assets from one GRAT into another,
investors enjoy short-term gains each time a trust ends. "Instead of making a
bet on a 10-year period, this strategy has a higher probability that your GRAT
will exceed the IRS threshold," Elliott says.
Despite the headaches and increased scrutiny, Nina Cohen,
managing director of philanthropic advisory services with Glenmede Trust in
Philadelphia, says that donors need not stop supporting their child’s school.
But donors must obtain an acknowledgment from the school stating that each gift
is a charitable contribution, and neither the donor nor anyone related to the
donor receives any personal benefit.
Photo Illustrations by C. J. Burton.
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