Perfect Storm of Estate Planning Opportunities
I had the opportunity to introduce financial advisor Paul Comstock this week for a video presentation he gave to the Gift Planning Council for the Philanthropies Department of the Church of Jesus Christ of Latter-day Saints. The presentation given to estate and financial planning professionals discussed a planning opportunity that exists right now to leverage charitable giving and estate planning with a Charitable Lead Trust. This is just one of many opportunities that exist right now because of a perfect storm of factors that are creating some incredible planning opportunities.
The ongoing COVID-19 pandemic has wreaked havoc on all of our lives. One of the negative consequences has been the damage to the economy. While these events are surely ones we would never invite, as Benjamin Franklin once said, “Out of adversity comes opportunity.” The perfect storm that now exists is a result of the convergence of:
Depressed Asset Values;
Low Interest Rates; and
High Exemption Amounts
If the value of your assets have taken a hit over the last few months, now may be a perfect opportunity to move those assets to the next generation or to an irrevocable trust before the value of the asset increases again. If you can sell or gift the assets at a lower value, future appreciation will happen outside of your estate for estate tax purposes. This means more to your family or favorite charity and less to the government.
In addition to depressed asset values, interest rates are at historic lows. The two rates that we watch closely in estate planning are the applicable federal rate and the 7520 rate. The applicable federal rate (AFR) is the minimum interest rate the IRS allows for private loans. The long term AFR (loans lasting longer than nine years) for May is 1.15% for June that rate will be 1.01%. For shorter term notes, the rate is even lower. This allows intra-family loans or sales with next to no interest. A great opportunity to freeze that lower value in your estate, receive less taxable income, and not trigger gift tax consequences.
The 7520 rate is used in the valuation of long-term or future property interests. This could include annuities, life estates, remainder interests, and reversionary interests. Because the present value of each of these interests for tax reporting purposes is based on the 7520 rate, the low rate may result in gifted interests having a lower value for gift tax purposes. The current 7520 rate is at the unheard of low rate of 0.80% and is moving to 0.60% in June.
An example of a technique using this strategy is the Grantor Retained Annuity Trust (GRAT). With a GRAT, the grantor transfers assets to the GRAT. The GRAT then pays her an annuity for a fixed number of years. Once the term of the GRAT concludes, the remaining property in the trust then passes to the beneficiaries either outright or in trust. The transfer of assets to the GRAT is treated as a gift to the beneficiaries equal to the initial value of the trust assets, reduced by the present value of the annuity to be paid to the grantor. In a zeroed-out GRAT, the annuity is structured to produce little or no gift. The present value calculation is based, in part, on the 7520 rate at the time the GRAT is created. Any income or appreciation on the trust assets in excess of the 7520 rate passes, at the end of the annuity term, to the beneficiaries free of gift and estate tax. Therefore, the lower the 7520 rate the better. Rates have rarely, if ever, been lower.
Finally, the current estate, gift, and generation skipping transfer tax exemption is $11.58 million per person (double that for a married couple). This is the amount an individual can move free of estate, gift, or generation skipping transfer tax. The exemptions have never been higher. Unfortunately, these amounts, if not extended or made permanent by December 31, 2025 will be reverting back to the lower exemption amounts that existed prior to 2018. While no one can say for sure whether that will happen, the recent stimulus packages passed in response to the pandemic will likely require higher taxes in the future. The high exemption amounts may become a casualty.
We never know just how long any of these opportunities will last. Therefore, we would encourage people facing potential estate tax liabilities to consider acting now to take advantage of this perfect storm of planning opportunities.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.