US IRS interest rate cuts to prompt year-end gifts
* December most favorable environment in a generation
* Rates on intra-family loans as low as 0.32 percent
* Asset managers expect a busy month in money transfers
By Linda Stern
WASHINGTON, Nov 22 (Reuters) - The interest rates the Internal Revenue Service uses to calculate the value of annuities, gifts, family loans and trusts will sink to an all-time low in December and, prompting advisors to encourage wealthy clients to give away money before the end of the year.
"We haven't seen this kind of favorable gifting or transfer environment in our lifetime," Don Weigandt, managing director for wealth advisory with J. P. Morgan Private Bank, told Reuters in an interview.
Weigandt and others are promoting year end intra-family gifts for a variety of reasons, including super low IRS rates, a lower-than-usual 35 percent gift tax rate (for 2010 alone) and the fact many assets, including shares, second homes and family-held businesses are still worth less than a few years ago. Put together, all of those factors should result in families being able to transfer wealth while paying minimal taxes this year.
"I'm expecting to see some real action in December. We're going to be really busy with clients transferring assets to their kids,' said Weigandt.
Here are some strategies that advisors are recommending now.
Older investors can give property or money to their kids and set up an annuity so the younger generation pays some amount of that back to their parents every month. The idea behind that is to move money out of the older generation's estate and give it to the younger generation without it actually being deemed a taxable gift. To set it up properly, the annuity payment is calculated on the basis of those IRS interest rates and the age of the parent receiving the annuity.
That means those low rates help, according to calculations from the Tax & Accounting business at Thomson Reuters. A daughter receiving $1 million from her 70 year old father in December would have to pay $82,780 a year to him to make the transfer qualify as an annuity instead of a gift, under the effective December interest rate of 1.8 percent. If the IRS rate were a more typical 5 percent instead, her annual payment would have to be $107,319, the Tax & Accounting analysis said.
Family members often lend each other money in lieu of giving outright gifts. To be considered a tax free loan instead of a potentially taxable gift, it has to be set up with the borrower paying interest to the lender at rates set by the IRS. For loans made in December, the rates are 0.32 percent a year for loan terms no longer than 3 years; 1.53 percent for loans between 3 years and 10 years; and 3.53 percent, for loans designed to last 10 years or longer.
Those are extremely favorable rates that could enable a younger generation to buy homes now, while real estate prices are low, suggested Weigandt.
Older relatives can save on gift taxes by creating and funding an annuity trust. The trust makes annuity payments to them for a specified period and the remainder goes to a child or other recipient. The value of the amount left after the annuity payments is considered a gift that could be taxable. When rates are a middling 5 percent, a $1 million trust with a 10 year annuity would result in a $382,264 gift. Now, with that rate down at 1.8 percent, the potentially taxable gift would be $273,816, says the Tax & Accounting report.
Funding the trust with property that may seem undervalued, such as a family business that is about to go public, could boost the savings even more, Weigandt added.
(Editing by Andre Grenon)
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