The coronavirus (COVID-19) outbreak has given reason for us to not only make sure our estate plans reflect current wishes, but also to seek potential opportunities for smart tax planning. In the words of Albert Einstein, “[i]n the middle of difficulty lies opportunity.”
Your Estate Plan
Now is a perfect time to review your current estate plan to be sure that it accurately reflects your wishes. Over time, asset values change, tax laws change, and our wishes change. It is important to be sure that your will and/or revocable trust are up to date. It also is essential to be sure that your designated beneficiaries of your life insurance policies and retirement plans are what they should be (and are coordinated with your will/revocable trust). Finally, it is important to confirm that your health care power of attorney and financial power of attorney appoint the appropriate individual(s) as your agent(s).
Additional Planning Opportunities
Gifts
Stock market volatility has suppressed the value of assets across asset classes. This creates a good opportunity to gift, as it offers a low tax “cost” and an increased likelihood of appreciation of assets in the hands of the donee. There are limitless options for gifting. You might consider smaller gifts that are designed to use the annual gift tax exemption ($15,000 per person, per donee) or larger gifts designed to use your federal gift and estate tax exemption (currently $11,580,000 per person). Gifts can be outright or to an irrevocable trust, which can provide creditor protection for beneficiaries and possibly save taxes at their deaths.
Grantor Retained Annuity Trusts (GRATs)
One type of trust that can be particularly attractive in these uncertain times is a GRAT, which is a vehicle that moves the appreciation of assets to children or other beneficiaries. With a GRAT, you transfer certain assets to an irrevocable trust and retain the right to receive annuity payments which equal the value of your initial contribution, plus an assumed rate of return. This assumed rate of return, or “hurdle rate,” is currently 1.8 percent. Any appreciation of the assets in excess of the hurdle rate passes to the beneficiaries (typically children) free of gift tax.
Intrafamily Loans and Sales to Grantor Trusts
Interest rates are at historic lows, presenting an opportunity to make loans to children and grandchildren. Generally, one thinks of loans for significant purchases (e.g., purchase of a home or establishment of a business). However, a low interest loan can benefit beneficiaries by enabling them to invest in the stock market. If the total return of the beneficiary’s investments exceeds the low interest rate on the loan to the beneficiary, you have transferred wealth at minimal tax cost.
Low interest rates also make sales to grantor trusts attractive. It creates an opportunity to “swap out” low basis stock from irrevocable trusts, or to replace trust assets with assets that are likely to provide greater opportunity to appreciate.
