Estate Planning Tips in a COVID-19 Economy

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Taking advantage of present economic opportunities.

TAKEAWAYS

  • Now is the time to take advantage of opportunities to save on transfer taxes.
  • Tax filing deadlines are extended, interest rates and asset values are low, and exemptions from gift, estate and generation-skipping transfer (GST) tax are at an all-time high.

We recognize that this is a time of great stress for our communities and the country, and we respectfully acknowledge the distress the coronavirus pandemic has caused all of us. At the same time, we find that focusing on matters we can control, such as updating our estate planning documents and even taking advantage of present economic opportunities, can provide some relief from the concerns that we all have. Some of the extraordinary opportunities that exist today are as follows:

  1. In response to the COVID-19 outbreak, the Treasury Department and Internal Revenue Service announced on March 21, 2020 in IR-2020-58 that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020. Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020.

    This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers, as well as those who pay self-employment tax. This relief also includes estimated income tax payments for tax year 2020 that were originally due on April 15, 2020.

    This relief is automatic. Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individuals who need additional time to file beyond the July 15 deadline can request a filing extension by filing Form 4868. Businesses that need additional time must file Form 7004.

    The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.

    This relief also impacts the deadlines for contributions to IRAs and HSA accounts. For a list of IRS questions and answers refer to this Q&A.

    The IRS has announced that this relief does not apply to estate and gift taxes. Accordingly, normal filing and payment due dates continue to apply to estate and gift taxes.

    This relief only applies to federal income tax and does not apply to state income tax. Taxpayers will still need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and are not always the same as the federal filing and payment deadlines. The IRS urges taxpayers to check with their state tax agencies for those details. More information is available at this link.
  2. There are extraordinarily low interest rates at this time. The required minimum federal interest rate for transfers between related parties (the “applicable federal rate” or AFR) for April 2020 is very low: Short-Term Annual AFR is 0.91 percent; Mid-Term Annual AFR is 0.99 percent; and Long-Term Annual AFR is 1.44 percent.
  3. Exemptions from gift, estate and generation-skipping transfer (GST) tax are at an all-time high and are scheduled to decrease under existing law at the end of 2025. The current gift/estate and GST tax exemption amounts are $11.58 million per individual.
  4. Asset values are low, making it an opportune time to make transfers such as gifts and leveraged sales.
  5. Currently, gifts to GST-exempt trusts can last for an unlimited number of generations. This number may be limited in the future. We advise making transfers—taking advantage of low interest rates and low asset values—to GST-exempt trusts with long durations to take advantage of this extraordinary opportunity.

    Now may also be an opportune time to make a transfer using a grantor retained annuity trust (GRAT). This mechanism provides for the transfer of assets to beneficiaries, such as family members or a trust for their benefit, at a reduced transfer tax cost. If you would like to discuss the pros and cons of using a GRAT or a leveraged sale to a trust, please feel free to contact us.
  6. For clients who have previously used a promissory note to transfer assets to beneficiaries or to a trust, now may be an opportune time to refinance such a note. Given the extremely low AFR rates, refinancing is a simple way to increase the amount transferred to beneficiaries without incurring additional transfer tax.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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