Colonel F. Betz Partner

The continued uncertainty in the stock market coupled with the coming wave of loan maturities have left investors looking for alternatives asset classes and different places to park their money.

2012 may be the ideal year for Washington residents to make gifts.  The combination of the current Washington State tax laws and the change in the federal transfer tax structure presents a unique opportunity for residents to make large gifts to reduce the impact of the State estate tax.

As indicated in a prior update, on June 22, 2011, the SEC adopted a rule (Rule) defining the term "family office" for purposes of identifying entities eligible for exclusion from registration as an investment adviser under the Investment Advisers Act of 1940 (Advisers Act).  In connection therewith, the staff of the Division of Investment Management (Staff) recently provided responses to select questions regarding the definition of a "family office" under the Rule.  Highlighted below are (i) summaries of the Staff's responses to a few of the more pertinent questions, and (ii) a reminder with respect to a few provisions of the Rule which may cause the unsuspecting family office to inadvertently fall outside of the registration exclusion

You already know how tax-deferred plans benefit your retirement planning, but do you know how to maximize their benefits for your favorite charities?

A lifetime gift to a charitable remainder trust (CRT) can produce impressive tax and nontax results. A gift to a CRT qualifies for current income and gift tax charitable deductions although the charity will not have the beneficial use of the property until the noncharitable interests expire. In the meantime, the donor or other noncharitable beneficiaries will receive payments from the trust. Transferring highly appreciated assets to a CRT is particularly attractive - especially for donors who have some charitable interests.

The federal gift tax annual exclusion currently allows each individual to give up to $13,000 each year to an unlimited number of donees – entirely free of tax. (Under the 1997 Tax Act, the amount of the exclusion is indexed to inflation and is rounded to the next lowest multiple of $1,000.)

Charitable lead trusts (CLTs) offer a tax advantaged way to transfer property to family members after a term during which fixed amounts are payable to one or more charities. CLTs can provide for the payment to charity to be in the form of either a fixed amount (an annuity form of trust) or a fixed percentage of the annually determined value of the assets of the trust (a unitrust). CLTs almost always take the form of an annuity trust (a so-called CLAT), because it generally offers a greater overall benefit.

GRATs are a special type of trust, first authorized by Congress in 1990, that can greatly reduce the tax cost of making gifts. Importantly, recent developments confirm that GRATs can be planned that entirely eliminate gift tax costs. GRATs are particularly attractive because they have essentially no downside risk.

A QPRT is simply an irrevocable trust to which an individual (the "grantor") transfers a personal residence, reserving the right to occupy the residence for a term of a certain number of years. At the end of the term, the trustee of a QPRT either distributes the residence to the designated beneficiaries - usually the grantor's children - or retains the residence in trust for later distribution to the beneficiaries. If the trust continues, the trustee can lease the residence back to the grantor at a market rental rate without causing the residence to be included in the grantor's estate.

On February 3, 2005, the Washington Supreme Court rendered a decision that effectively repealed the Washington estate tax. The legislature and the governor responded by enacting a new State estate tax to address the loss of tax revenue that would otherwise be incurred by the State.