In the middle of difficulty lies opportunity.
Amid the ever-evolving news around coronavirus, current depressed stock prices, and the uncertainty of the political outcomes in November, we recommend you make use of the following three primary estate planning strategies: empower yourself; make gifts; know your assets.
Empower Yourself: Take Advantage of the Current (Yet Temporary) Increased Exemption from Estate, Gift, and Generation-Skipping Transfer Taxes
The Law Is Temporarily in Taxpayers’ Favor.
- In 2018, the federal tax law changed to allow individuals to transfer double the amount of assets they were previously able to gift or transfer tax free. Currently, individuals can transfer $11.58 million or couples can transfer more than $23,160,000. This is a temporary law that will sunset in December 2025.
- After December 2025, unless new laws are passed, the exemption will drop to only $5.49 million (or $10.98 million for couples) as indexed for inflation.
- New York residents have the advantage of gifting the full exemption amount as a strategy to minimize New York state estate tax, which currently imposes state taxes on assets over only $5,850,000.
Make Gifts and Loans
Make Annual Exclusion Gifts of Depressed Stock of $15,000 per Person ($30,000 per Married Couple) to Any Individual (or Preferably to a Trust for Children/Grandchildren or Invest in a 529 Plan).
- With depressed stock values, it is a great time to make gifts of low-value stock with high appreciating value (and this is preferred to cash gifts), since growth will be in the children’s names outside of your taxable estate.
- Consider making gifts to a trust to protect the assets for children from their creditors (divorce) and from taxation in the child’s estate.
Make Gifts or Sell Assets Now to a Spousal Lifetime Access Trust (SLAT).
- You may be thinking, in these uncertain times, “I am too conservative to ‘give away’ any property” – hence a spousal lifetime access trust for the benefit of your spouse and children. At your spouse's death, the assets pass in trust for successive generations and beyond. There is some risk to consider with this strategy: if you get divorced, you would no longer have access to the assets through your spouse, but you can ensure that your divorced spouse no longer has access either.
- SLATs are advantageous for creditor protection and tax efficiency purposes.
Make Gifts Now to a Grantor Retained Annuity Trust or Swap Out Low-Performing Assets from a GRAT.
- Another excellent gifting strategy in uncertain terms is a grantor retained annuity trust to take advantage of the low interest rates and move appreciation to children when taking advantage of the depressed value of assets.
- If the value of assets in an existing GRAT is low and underperforming, freeze the GRAT by swapping out the assets for high-basis assets, cash, or bonds and create a new GRAT to lock in the low interest rate and potential appreciation in a new GRAT.
Take Advantage of Intrafamily Loans.
- Making a loan to a trust for a child (if the trust is set up as a grantor trust) is advantageous for income tax purposes. Ordinarily, the interest payments on the note must be included in your taxable income, but not if the trust is a grantor trust.
Know Your Assets
Review Assets Held in Current Irrevocable Trusts for Income Tax Basis Planning.
- Given the depressed markets, review the value (and basis) of assets already funded in irrevocable trusts. It may be advantageous to swap out low-basis assets from a trust back to the individual grantor, so that those low-basis assets remain in the hands of the grantor to receive a step up in basis for income tax purposes at death of the grantor.
Review IRA and Retirement Accounts in Light of the New 2020 Laws.