Our primary concern during this highly unusual time is that you and your family are safe and sound. We urge you to remain as cautious and well-informed as possible. As always, we remain available to assist with your estate planning, including reviewing your estate plan with you, if you, like many of our clients, feel so inclined.
The coronavirus pandemic has not only upended our daily lives and caused major health concerns but, as you are undoubtedly aware, it has also significantly impacted our economy. This impact, while negative on its face, presents a unique opportunity from a wealth transfer planning perspective. We recognize that wealth transfer planning is currently far from your most pressing concern, but believe that, as your estate planning advisers, we would be remiss if we did not at least highlight some of these opportunities for you.
Accordingly, this memorandum briefly summarizes a few simple, tried and true techniques that are even more beneficial in our current economic environment of depressed values and low federal interest rates. If you would like to discuss any of these techniques in more detail, please contact us.
Gifts: Gift an undervalued asset, such as stock or real estate, to children and more remote descendants. You will transfer all of the future appreciation on the gifted asset free from transfer tax—including any undervaluation discount attributable to market influences. You will leverage the use of your exemptions and/or pay less gift tax.
Trusts: Use trusts to hold assets for the benefit of your children or more remote descendants. A trust provides creditor protection, allows for asset management and control, preserves tax benefits and, if structured as a “grantor trust,” allows you to make what effectively amounts to tax free gifts to the trust beneficiaries by your being responsible for paying the income tax attributable to trust assets.
GRATs and Sales to Trusts: Select an undervalued asset, preferably one that has a high potential for appreciation, and contribute it to a grantor retained annuity trust (a GRAT) or sell it to a grantor trust in exchange for a promissory note.
Using either technique, the transfer is structured so there is little to no transfer tax consequence. The fair market value of the asset on the transfer date, plus an assumed rate of return (in the case of a GRAT) or a fixed interest rate (in the case of a sale), is returned to you over time, either in the form of annuity payments or note repayments. To the extent the transferred asset outperforms that rate, value passes to the trust with no transfer tax consequence. The applicable federal assumed rate of return and loan interest rates change monthly and are all currently less than 1.5%.
Loans: Loan assets to a grantor trust. As long as the asset in the trust outperforms the interest rate on the note, value passes to the trust without any transfer tax consequence.
Refinance existing intra family loans to take advantage of lower interest rates, so that family members and trusts benefit more from those loans.
As stated above, the applicable federal loan interest rates change monthly and are all currently less than 1.5%.