The Coronavirus has not only overwhelmed us with health concerns, it also has had significant economic ramifications, as indicated particularly by the decline of the stock market.
Though many are preoccupied with fears relating to the short-term effects on their investments, there are also worries concerning the long-term impact on investment and retirement savings. However, unique opportunities have arisen, and with proper planning these benefits can be actualized.
Coupled with the fact that the estate tax exemption under the Tax Cuts and Jobs Act is due to expire in 2025, this may be a great time to gift assets out of your estate.
For those looking to reduce their taxable estate, taking advantage of the low interest rates in the form of GRATs and note sales to IDGTs may prove to be a strategic plan of action.
For small businesses hit hard by the downturn in the economy, family business owners may consider transferring the business into a trust while the value of the business is diminished.
Lower Gift Tax Value
As many assets have been hit hard by the stock market decline, this may be the perfect time to gift those assets. Although the assets currently have a reduced gift tax value, when the stock market rebounds, the increased value will not be included in your estate. Methods of gifting assets include outright gifting to descendants using the annual gift tax exclusion of $15,000 or gifting assets into trusts using Crummey powers to utilize the annual gift tax exclusion.
Another option includes using a Spousal Lifetime Access Trust (“SLAT”) in which the grantor spouse gifts assets to a trust of which the other spouse is the trustee, this enabling full access to assets in the trust. The grantor can then make gifts to the trust using the entire $11.58mm lifetime gift/estate tax exemption.
A Grantor Retained Annuity Trust (“GRAT”) can help clients grant highly valued assets out of their estate. Assets that have a depreciated value are transferred to the GRAT but the grantor retains the right to an annuity interest for a set number of years. After those years have passed, the assets in the GRAT are transferred to the remainder trust beneficiary. All income and principal beyond what is needed to pay the annuity is held for the benefit of the remainder beneficiary. If the assets increase in value, the remainder beneficiary will receive an asset with a significantly higher value than when it was transferred to the trust.
Using Intentionally Defective Grantor Trusts (“IDGT”) the grantor sells property to the trust in exchange for a note. In this way the sale is not taxable because as a Grantor Trust, the trust is not recognized as a separate taxable entity for income tax purposes. Since it is a grantor trust, the interest on the note is also not subject to income tax. Further, if the amount on the note is equal to the fair market value of the asset sold to the trust, then it is not considered a gift. Finally, the appreciation of the asset after the sale is excluded from the grantor’s taxable estate.
Additionally, many investors encourage clients that now is a recommended time do Roth IRA conversions. Since the value of assets is expected to rebound in the future the benefit of doing a Roth IRA conversion is magnified.
While you may be preoccupied at this time it is an opportune time to take note of potential tax benefits.
Feel free to reach out to discuss these opportunities further.