Current Conditions are Favorable for Cost-Effective Wealth Transfers

The ongoing novel coronavirus (COVID-19) pandemic has taken a terrible toll on the economy. But the current low-interest-rate environment coupled with depressed asset values means that now may be a good time to transfer wealth to your children and grandchildren.

Consider making gifts

For 2020, the federal gift and estate tax exemption is an inflation-adjusted $11.58 million ($23.16 million for married couples), the highest it’s ever been. The exemption is scheduled to drop to its pre-2018 level of $5 million (indexed for inflation) on January 1, 2026.

This window of opportunity could close sooner, however, depending on the results of this fall’s election. So if you have a large estate, it’s a good time to consider making substantial tax-exempt gifts to your loved ones as a hedge against future reductions to the exemption amount.

Gifting is a particularly good strategy during an economic downturn, because the values of many assets, such as stocks and real estate, are temporarily depressed. In addition, low interest rates make certain estate planning techniques, such as grantor retained annuity trusts (GRATs), even more powerful.

Why GRATs are great now

A GRAT is an irrevocable trust that pays you an annuity during the trust term and then distributes any remaining assets to your children or other beneficiaries. Your contributions to the trust are treated as taxable gifts to your beneficiaries, but the value of the gift is limited to the present value of the remainder interest.

To calculate the gift tax value, the present value of the annuity payments is subtracted from the value of the assets you contribute to the GRAT. Present value is based on a conservative, assumed rate of return commonly known as the Section 7520 rate. At the time of this writing, that rate, which is published monthly by the IRS, was under 1%.

If you set the annuity payments high enough or the trust term long enough, you can minimize the value of the gift for gift tax purposes or even reduce it to zero. And so long as the trust assets outperform the Sec. 7520 rate (and you survive the trust term), your beneficiaries will receive a substantial amount of wealth at the end of the term, free of gift and estate taxes.

GRATs are an attractive option when interest rates are low because it’s easier to outperform the Sec. 7520 rate, maximizing the amount of wealth you can transfer tax free. And if you fund a GRAT with assets whose values are depressed and are expected to appreciate significantly in the future, the benefits a GRAT provides are that much greater.

Prioritize what’s important

During times like these, your family’s health is your first priority. But it’s also important to take into account their future financial security. That means taking advantage of current low interest rates and depressed asset values to cost effectively transfer wealth. Contact us for additional details on the best strategies to transfer wealth to your heirs during this difficult time.

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