If you're looking forward to the scheduled repeal of the federal estate tax in 2010, you should know that President Obama and the Democrats in Congress are widely expected to lock in the tax at its current rate (45 percent) and exemption levels ($3.5 million, $7 million for couples). 

If your taxable estate exceeds the applicable exemption amount, you may be able to take advantage of currently low asset values to implement a variety of tax-saving strategies, as discussed below. In general, they are designed to remove the assets' future earnings and appreciation from your taxable estate and, in certain cases, from personal income taxes.

Annual Gifting
This year you can give up to $13,000 per person―in cash or property―to an unlimited number of recipients without incurring a gift tax. If your spouse shares in the gift, you can give up to $26,000 per person.

This type of annual gifting can be a particularly useful strategy in a down market. Assume you own stock that was worth $65 per share. Before the loss in value, you could have made tax-free gifts this year of up to 200 shares per person. Now assume that those shares have dropped in value to $50. You can now gift up to 260 shares per person. As a result of the decrease in value, you can gift more shares during the year free of tax. In the future, when the gifted shares recover their value, they are not part of your taxable estate. 

In addition to the annual gift tax exemptions, you have an estate and gift tax exemption of $1,000,000 for lifetime or at-death gifts. You also have an additional estate tax exemption of $2,500,000 for transfers made after your death. This means you can choose to make gifts of more than the annual exclusion amount as part of an overall estate planning strategy.

It is important to carefully consider any assets you gift under these circumstances. A decrease in the value of an asset below your tax basis generates a loss for tax purposes upon sale or disposal of the asset. On the other hand, if you gift the asset, you cannot benefit from the unrealized loss. You may instead prefer to gift other assets for which the value has not fallen below your tax basis.

Intra-family Lending
If you can't or would prefer not to provide a gift, the IRS' rate for short-term intra-family lending is at historic lows. Assuming the child or other family member that you lend to earns more on the use of the funds than the IRS' interest rate, his or her gains are free of gift tax.

Roth IRAs and Traditional-to-Roth IRA Conversions
A down market can be a good time to invest in devalued assets for a Roth IRA. It may also be a good time to convert your retirement assets from a traditional IRA to a Roth IRA, assuming you qualify. (You are not eligible to convert your traditional IRA if your modified adjusted gross income exceeds $100,000, and other restrictions apply.)

Unlike traditional IRAs, Roth IRAs allow you to withdraw your contributions and earnings tax-free. If you invest in devalued assets in (or convert the assets to) a Roth IRA, the future appreciation is tax-free. Further, there are no required minimum withdrawals from an IRA, so all IRA assets continue to grow tax-free.

If you are eligible to convert your traditional IRA, you will have to pay income tax on all pre-tax IRA contributions and earnings. However, there is a benefit in that these taxes reduce the value of your estate for estate tax purposes.

Grantor-Retained Annuity Trust (GRAT)
A GRAT is an irrevocable trust, established for a predetermined period of time and intended to transfer the appreciation of trust assets to beneficiaries free of gift tax. GRATS are generally most beneficial when asset values are down and interest rates are low, as they are now.

When you establish a GRAT, you transfer assets―potentially including personal or real property― to the trust. The trust then makes an annual annuity payment to you each year for the life of the trust, the amount of which is based on a present value calculation that includes an IRS-mandated interest rate. These interest rates are currently very low, which makes GRATs particularly attractive at present.

At the end of the trust term, if the appreciated value of the assets exceeds the sum of the annuity payments, the assets pass to your beneficiary free of gift tax on the appreciation. If the value of the assets is less than the sum of the annuity payments, the assets return to you with no gift tax implications. As a result, there is little downside to a GRAT. You can simply take the assets that have been returned to you and try again. 

To maximize the chance of capturing the assets' rise in value, it's common to employ a rolling GRAT strategy and a short trust term.

One caution: If you die before the term of the GRAT expires, the assets become part of your estate.

Intentionally Defective Grantor Trust (IDGT)
A variation on the grantor trust, an intentionally defective grantor trust uses the funds provided by you to purchase assets that are part of your estate. Generally the purchase includes a down-payment and a promissory note with an interest rate based on an applicable federal rate. Since the interest payment is from the grantor trust to you, it is disregarded for tax purposes.

Any appreciation in the value of the assets is retained by the trust for estate tax purposes, and not your estate.

Charitable Lead Trust (CLT)
A charitable lead trust is an irrevocable trust that distributes income to charity for a specified period of time, after which the assets―including any appreciation―are transferred to a noncharitable beneficiary. If you are the beneficiary, it is referred to as a grantor CLT. If the beneficiary is someone else, it is a nongrantor CLT.

When your assets are transferred to a nongrantor CLT, you receive a gift and estate tax charitable deduction based on the present value of the charitable income stream. The higher the payout and the longer the charitable term selected, the higher the deduction.

A nongrantor CLT is a taxable entity, therefore any income earned or capital gains realized from the assets in the trust are taxed to the trust, and not to you. The trust also receives a charitable deduction when payments are made to the charity. You are not entitled to a charitable deduction for income tax purposes on your individual return.

Because assets transferred to the CLT are not considered part of your estate, any significant appreciation in value is not subject to gift or estate tax. The growth in value is essentially transferred tax-free to your noncharitable beneficiary. (It is important to note that generation-skipping tax implications should be considered if the noncharitable beneficiary is a grandchild or great grandchild.)

Grantor CLTs are primarily income tax planning tools. The grantor takes charitable income and gift tax deductions for the actuarially determined fair market value of the income interest in the year the trust is created, subject to certain adjusted gross income limitations.

At the end of the charitable term, the trust's assets―including appreciation―revert back to the grantor. Consequently, grantor CLTs are of limited value in reducing estate taxes.

Qualified Personal Residence Trust (QPRT)
A Qualified Personal Residence Trust, or QPRT, is a trust to which you contribute your personal residence. The trust can provide a significant financial benefit yet still allow you to maintain significant control over your home - including the right to live there for a predetermined number of years.

After that time, the home passes from the QPRT to your children or other beneficiaries. If you continue to live in the home thereafter, you must make fair market rental payments to your beneficiaries.

The financial benefit of the QPRT stems from the timing. Because you are transferring ownership to the trust and reporting the gift during your lifetime, the home's value will not be included in your estate for tax purposes. 

And because your beneficiaries must wait before taking ownership of the home, the value of your gift to them for gift tax purposes is far less than the home's current value. The exact value depends on several factors, including the term of the trust and the current applicable federal interest rate. Depending on the length of the trust term, the value of the gift can be reduced so that there is little or no gift tax due.

During the term of the QPRT, you can continue to pay your home's expenses by depositing funds with the trustee. The trust is generally ignored for income tax purposes, so you continue to deduct real estate taxes and interest, if any, on your personal income tax return. A separate income tax return for the trust is generally not required.

The art of setting up a QPRT is in the selection of an appropriate term of years. Ideally the term will be long enough to minimize the gift tax and allow you to maintain control of the home for life, but not so long that you die before the term expires. Assuming that you outlive the term of the trust, your home passes to your beneficiaries without additional gift or estate taxes. Any additional appreciation is effectively removed from your estate.