714-505-9000 cpas@hmwccpa.com

Is time running out for GRATs?

The grantor retained annuity trust (GRAT) is an estate planning tool that can allow you to transfer substantial amounts of wealth to your children or other family members at a minimal gift tax cost. It’s even possible to design a “zeroed-out” GRAT that does away with gift taxes altogether.

To enjoy these benefits, however, you must survive the trust term. For that reason, most people who take advantage of GRATs use shorter terms of two or three years.

Recent legislative proposals, if enacted, would limit the benefits of GRATs. They’d establish a 10-year minimum term and eliminate zeroed-out GRATs. If you’re considering using GRATs, act soon, in case their benefits are curtailed in the future.

Enhanced tax benefits for conservation easements

Taxpayers who grant qualifying conservation easements — which restrict development rights on their property — are entitled to deduct the value of those easements as charitable gifts. Ordinarily, these deductions are limited to 30% of a donor’s adjusted gross income (AGI), with any excess carried forward for up to five years. But in 2006, Congress temporarily increased these limits through the end of 2011 to, respectively, 50% of AGI (100% for certain farmers and ranchers) and 15 years.

The American Taxpayer Relief Act of 2012 reinstated these tax benefits retroactively to the beginning of 2012 and through the end of 2013.

Self-directed IRAs: Handle with care

A typical IRA holds publicly traded stock, bonds, mutual funds and other conventional investments. But some people use self-directed IRAs to hold “alternative” investments, such as real estate or closely held business interests. A recent U.S. Tax Court case illustrates the risk involved in this strategy.

In Peek v. Commissioner, two individuals used their IRAs to purchase a corporation they had formed. They then used the cash from their IRAs, together with several loans, some of which they had personally guaranteed, to acquire a business. Later, the owners converted their IRAs into Roth IRAs and eventually sold the acquired business for a substantial profit. The owners didn’t report this gain on their individual tax returns, because their interests in the business were held in Roth IRAs at the time of the sale.

The Tax Court held that the loan guarantees constituted an indirect extension of credit to the IRAs, which is a prohibited transaction. As a result, the IRAs were deemed terminated, and the owners became liable for income taxes on the gain.