Monday, May 11, 2020

How to not “waste” a crisis

Every cloud allegedly has a silver lining. Estate planners have discovered a potential silver lining in the current economic crisis. Estate planning strategies now may be implemented at a much reduced tax cost, because asset values have fallen.
            At today’s lower
 asset values, much more may be transferred via gift before breaching the taxable threshold of $11.58 million per person.  It’s not just publicly traded stocks that are down in price. Nonmarketable securities, the value of family businesses, and real estate are down similar percentages, according to estate planner Alan Gassman, as reported in Tax Notes. For those who have been contemplating major gifts within the family, this may prove an opportune moment to pull the trigger.
            Roth IRA conversions.  One response to this year’s loss of the stretch IRA for long-term wealth management has been the recommendation to convert retirement assets to Roth IRAs. The immediate tax cost of such a conversion can be hard to swallow. Today’s lower asset values mean lower taxes for conversions now. Should prices recover after the pandemic recedes, all that gain will be tax free.          
            Several estate planning strategies rely upon the “Section 7520” interest rate in determining taxable values of transfers.  As the Federal Reserve has lowered interest rates to help the economy, the 7520 rate has fallen, standing at 1.2% for April 2020 (it was 2.2% in February). Lower interest rates improve the math for some strategies, especially when coupled with reduced asset values.
            GRATs. In a grantor-retained annuity trust, the trust creator is paid a fixed dollar amount for a term of years. If the grantor survives the term, assets pass to the remainder beneficiaries and won’t be included in the grantor’s taxable estate. The GRAT is a useful tool for transferring asset appreciation in excess of the 7520 rate without further transfer taxation.
            Asset freezes.  A grantor may sell an asset to an intentionally defective grantor trust in exchange for a note. If the note equals the value of the asset, there will be no gift tax, it will be a sale for full consideration. The interest rate on the note should match IRS guidelines—for April 2020, the mid-term interest rate is 1.9%. The note will be included in the grantor’s estate, but asset appreciation in the trust assets will pass without further transfer tax, freezing the taxable value. The grantor will owe tax on the trust income, which may further deplete the taxable estate.
            On paper, these strategies appear to confer substantial tax benefits. However, estate planners have been reporting that many clients have not looked at the opportunity with enthusiasm.  There is just too much uncertainty about how the pandemic and its economic fallout will play out. Still, if you’ve been thinking about taking a major estate planning step, this could be an ideal time to move ahead with the plan.
 (May 2020)
© 2020 M.A. Co.  All rights reserved.

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