By Jennifer M. Boll, Esq.
In the last several months, we have seen the drastic impact of the COVID-19 crisis on our health, way of living and the economy. While these times may feel uncertain, there are still many factors in your control and even opportunities for those who seek them out. This is especially true as it relates to your estate and tax plan.
The current environment of low interest rates and depressed asset values presents several unique estate planning opportunities for individuals to make the most of their hard-hit assets and leverage the transfer of wealth and business interests. There are a few items to consider.
• Federal gift tax exemption and annual exclusion remain at all time highs.
In 2020, the federal gift and estate tax lifetime exemption amount is $11.58 million per individual, and the annual exclusion for gifts is $15,000 per recipient per year.
These figures will remain in effect until 2026, when the lifetime exemption will “sunset” and revert back to approximately $5 million (as adjusted for inflation), barring any intervening legislation before then. The IRS has also clarified that individuals making gifts prior to 2026 can do so without concern that they will lose the tax benefit of the higher exclusion level if the current law sunsets.
• Depressed asset values = opportunity for tax advantaged transfers.
Whether you want to leverage your annual exclusions, preserve your federal exemption or limit your gift tax exposure, the depressed asset values and business interests provide an opportunity to make tax advantaged transfers to other individuals or trusts and allow any future growth to occur outside of your estate.
While outright gifts are certainly an option, the transfer of appreciable assets and interests to certain trusts can provide additional benefits and tax advantages that are intensified under the current depressed value conditions.
Trust instruments such as Grantor Retained Annuity Trusts (GRAT), Charitable Lead Annuity Trusts (CLAT) and Intentionally Defective Grantor Trusts (IDGT), are just a few examples of low-risk vehicles that facilitate tax advantaged transfers of appreciable assets while reducing your taxable estate. The advantages of these options are further amplified when the interest rates used in determining the taxability of such transfers are lower.
• Low interest rates = more efficient tax advantaged transfers.
In response to the slowed economy, we have seen various interest rates being lowered to stimulate economic growth and to encourage borrowing and investment. This includes reductions in interest rates like the IRS §7520 Rate and Applicable Federal Rates (FAR) that directly affect the taxability of transferring wealth and business interests.
Historically low IRS §7520 Rate: The IRS §7520 rate, a rate used to determine the gift tax consequences of transfers to trusts like GRATs and CLATs, has reached a historic low of 0.8 percent in May 2020. This is down from 2.8 percent in May 2019, and 3.2 percent in May of 2018.
Simply stated – the current §7520 rate presents an opportunity to make larger gift-tax advantaged transfers to your beneficiaries.
Low applicable federal rates: We have also seen drastic reductions in the Applicable Federal Rates (AFR), which are used to determine interest charged on below-market value loans and promissory notes.
Low AFR makes this a good time to consider issuing or restructuring loans to family members while also reducing your taxable estate. This method of transfer is most successful if the assets appreciate over the course of the loan in excess of the applicable AFR.
For owners of closely held businesses, it may also be a good time to consider transferring your closely held business interests to your family members or successors. Tax advantaged transfers of business interests can be accomplished by strategic gifting plans or by a series of sales. While circumstances will vary for each individual and his or her business, in many cases, low AFR will permit larger tax advantaged transfers.
• Higher deductions for charitable giving = rewards for reducing your estate while giving more to those in need.
The recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) encourages individuals and corporations to “give more” by increasing tax deductions for charitable donations.