Estate freeze techniques range from simple gifting strategies, installment sale arrangements to complex arrangements involving private annuities, "grantor retained annuity trusts" (GRATs) and "intentionally defective grantor trusts" (IDGTs). No one approach fits all situations.

Annual gifting strategy

The annual gift tax exclusion allows you to give $13,000 (2009 figure, up from $12,000 in 2008) per done per year without incurring federal gift tax. Generally, married couples can double the exclusion amount. This exclusion allows you to distribute your property gift tax free and potentially put your estate into a lower tax bracket.

Installment Sales

Perhaps the easiest way to freeze asset value for estate tax purposes is to simply sell the asset for its current value, but structure the sale as an installment sale. With an installment sale, the sale price is paid in periodic installments over a fixed period of time, thus providing the seller with a stream of future income. If the asset that is sold appreciates in value over time, the appreciation is removed from the seller's estate. A disadvantage of an installment sale is that, as with any sale, the seller must pay tax on the capital gains realized on the sale. (The buyer will have a basis in the property equal to the price paid for it.) The seller must also feel comfortable that the buyer, who might be a child or other family member, will have the necessary financial resources to make the periodic payments over time.

Use in family businesses.

Stock in a privately held company can be a good asset to transfer through an installment sale, particularly if the buyer is a family member who is working in the business or if the seller anticipates that there might be dramatic appreciation in value after an initial public offering. The seller will have locked in current value to protect his or her future cash flow, but will have also allowed the upside potential to be realized by the buyer.

Installment Sale to an "Intentionally Defective Grantor Trust"(IDGT)

A more complex variation on the installment sale theme involves an installment sale to a grantor trust. Some families find this technique to be useful in transmitting wealth in a tax-efficient way because future appreciation can pass to the next generation without triggering a current capital gains tax on the sale.

As an estate freeze technique, the use of an installment sale to an IDGT is considered to be fairly aggressive, and the intended tax results cannot be determined with absolute certainty. This technique has come under scrutiny from the IRS, so should only be entered into with a full understanding of the possible risks.

Grantor Trusts.

A "grantor" trust is a trust where the creator of the trust is treated as the owner of the trust property for income tax purposes. In its simplest form, a grantor trust is one that you, as the grantor, create for your own benefit, that is funded with your own assets. However, you can also create a grantor trust with other beneficiaries, for whose benefit you pay the trusts income tax liabilities. This type of trust is called an "intentionally defective grantor trust" or "IDGT." By paying the income taxes, the grantor is, in effect, making an additional gift to the trust beneficiaries.

Private Annuity

An annuity arrangement does not require the creation of a trust. In a typical private annuity transaction, a parent transfers property to a child in return for that child's unsecured promise to pay the parent an annuity amount for life. If the fair market value of the property transferred equals the present value of the annuity under IRS valuation tables, there is no gift tax due. However, if the property transferred does not grow at least as quickly as the required interest rate or is not an income-generating asset, the child may end up having to pay the annuity with some of the property received.

Grantor Retained Annuity Trusts (GRATs) and Grantor Retained Unitrusts (GRUTs)

One technique for gifting property away, but retaining cash flow from it is to use a "grantor retained annuity trust"("GRAT"). To implement a GRAT, you would transfer property to a trust, which then pays you an annuity based on a percentage of the value of the property you transferred to the trust. Since the trust pays you an annuity amount based on the initial value of the property, any future appreciation in the value of the property will pass to the ultimate trust beneficiaries, who may be family members.

A variation on the GRAT technique is a "grantor retained unitrust" ("GRUT"). A GRUT is just like a GRAT, except that the amount paid out to the donor is re-calculated each year, based on a percentage of the then fair market value of the property owned by the trust.

GRATs and GRUTs continue for a fixed term of years. Because the ultimate beneficiaries do not get the trust property until after the term expires, the donor can claim a discount on the value of the property being transferred to the beneficiaries. The amount of the discount will depend on the term, the donor's age at the time of the gift, and the IRS interest rates in effect at the time the trust is established. However, if the donor does not survive the trust term, the property will be included in the donors estate for tax purposes and the advantage of the discount will be lost.

GRATs and GRUTs will not be successful estate planning tools unless the earnings of the trust property, plus future appreciation, exceeds the amount to be paid out to the donor in annuity or unitrust payments. The type of property being transferred will also affect whether a GRAT or a GRUT is a better choice. For example, rental real estate in a hot real estate market may be a good asset for a GRAT, because the income stream is likely to be reliable, whereas if the trust property consists of a portfolio of speculative or growth stocks, a GRUT is probably a better choice.

As with other gifts, GRAT or GRUT beneficiaries receive a carryover basis in the property. That is, they will have the same cost basis in the property as the donor.