REVIEW YOUR ESTATE PLAN
First and foremost, while we always recommend that clients review their estate planning documents and beneficiary designations on a regular basis, it is now more important than ever to ensure that your current plan, including the designation of agents in powers of attorney and health care directives, reflects your wishes.
IDEAL TIME FOR GIFTING
While this period of history is uncertain and scary, several factors make now a particularly opportune moment for the transfer of assets to your heirs on a tax-efficient basis.
- Increased Estate Tax Exemption. The 2017 Tax Act doubled the federal estate and gift tax exemption, and this year’s exemption is $11.58 million per person. This historically high exemption is scheduled to revert to the previous amount ($5.6 million, adjusted for inflation) at the end of 2025. In addition, given the budget strain resulting from COVID-19, the federal government may decrease the estate and gift tax exemption ahead of the scheduled reversion.
- Low Interest Rates. While the federal estate and gift tax exemption is at an all-time high, certain federally-set interest rates key to several powerful estate planning strategies are at (or close to) an all-time low. It is anticipated that interest rates will rise as the effects of the pandemic ameliorate.
- Depressed Asset Values. The values of many assets (securities, business interests, real estate, etc.) have decreased significantly as a result of COVID-19’s effect on global economic activity. Values are expected to rise once economic activity resumes.
As a result of this unique combination of factors, many clients are taking advantage of the following time-sensitive estate planning techniques.
- Gifts to Family Members and Trusts. Given the high federal estate and gift tax exemption, and depressed asset values, now is an ideal environment in which to make outright transfers to family members and other beneficiaries, or to make transfers to irrevocable trusts.
- Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs). A grantor transfers assets (without using exemption) to a GRAT or a CLAT which lasts for a term of years. An annuity payment must be distributed annually (in the case of a GRAT, to the grantor and in the case of a CLAT, to a charity) and, at the end of the term,what remains in the trust is distributed to the remainder beneficiaries. Given that the annuity payment is based on the value of the assets transferred, as well as an IRS rate set monthly (called the “7520 rate”), which is currently historically low, it is a great strategy for transferring asset appreciation to the next generation. A lower 7520 rate enhances the ability to transfer more of such appreciation without gift tax consequences using these techniques.
- Intra-Family Loans. Funds can be loaned to a family member (or other individual) without gift tax consequences if secured by a promissory note with a stated interest rate no less than the prevailing (and currently quite low) Applicable Federal Rate (“AFR”). In turn, the family member can use those funds to purchase low value assets which are expected to appreciate. This technique can be used to transfer wealth to family members with no gift tax consequences to the transferor and very little interest owed by the transferee. In addition, clients may wish to refinance existing promissory notes.
- Transactions with Grantor Trusts. If you have already established an irrevocable trust where the income is taxable to you but the assets in the trust will not be includible in your federal estate (sometimes referred to as an “intentionally defective grantor trust”), you may wish to consider selling assets to the trust (in exchange for a promissory note with a low AFR), or, if the terms of the trust allow it, exchanging assets with the trust, so that assets expected to appreciate can grow estate tax-free within the trust. With careful planning, newly-established grantor trusts can also be used for such transactions.
- Roth IRA Conversion. If you have high value non-Roth retirement accounts, you may wish to talk with your financial and tax advisors about a Roth conversation. Since the tax paid is based on the value of assets converted, it may be an opportune time to do this.
Our lawyers and staff continue to work diligently (and remotely) to meet our clients’ needs, so please do not hesitate to reach out to us about the above planning techniques, or with any other questions.