6 techniques high net worth individuals should be considering now


On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law. It carries a price tag of over $2 trillion. In addition, Congress may not be finished with legislation to help Americans and American businesses recover from this crisis. At some point, we will recover. However, it is likely taxes will be raised to pay for this relief. Higher estate tax exemption rates are set to expire after 2025, reducing the per person exemption to around $5.8 million. In addition, historically low interest rates and asset values at suppressed values due to the COVID-19 crisis, makes this the perfect time to consider the following estate planning strategies.

1. Low valuation transfers

Consider transfers of publicly traded stock to children and grandchildren. Even the annual exclusion amount of $15,000 can avoid the appreciation of that stock being included in your estate.

Closely held business interests can also be transferred now when valuations are lower than in the past. Making these gifts into trusts as opposed to outright gifts can provide asset protection for your beneficiaries and also restrict access to the gift for minor or spendthrift beneficiaries.

2. Spousal Lifetime Access Trust (SLAT)

If there is concern about a spouse possibly needing access to a gifted asset in the future, married individuals should consider a Spousal Lifetime Access Trust (SLAT). With a SLAT, one spouse gifts assets to a trust that typically names children and the other spouse as a beneficiary. This provides an opportunity to access gifted assets are needed in the future. Assets gifted to a SLAT are not included in the estate of either spouse.

3. Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is another way you can gift a highly appreciating asset and remove it from your estate. With a GRAT you gift an asset that has lost value but which you expect to rebound (or any other highly appreciating asset), into the GRAT but retain the right to an annuity payment back from the trust for a term of years. The GRAT can be set up so that there is little or no gift tax cost if the present value of the annuity payments is equal to the value of the property transferred to the GRAT. At the end of the annuity term, the remaining value of the transferred asset passes to the beneficiaries of the trust.

A GRAT uses the “7520” rate which is an interest rate used to discount the value of an annuity payment to present value. The 7520 rate is revised monthly. The March 2020 rate is 1.80%. When combined with a lower valuation that is expected to rebound after the coronavirus difficulties resolve, this allows for significant growth to be removed from your estate for little or no gift tax cost.

4. Intentionally Defective Grantor Trust (IDGT)

With an Intentionally Defective Grantor Trust (IDGT), property is sold to an IDGT in exchange for a note. The sale is not taxable to you because the sale of assets to a grantor trust is not recognized. In addition, the interest paid on the note is also not taxed. The income the assets in the trust produce is taxed to you; further reducing your estate. At your death, only the remaining balance on the note is included in your estate. This allows you to sell assets with a depressed value to an IDGT without recognizing gain, and if the note equals the fair market value of the assets transferred, there is no gift.

5. Beneficiary Defective Inheritor’s Trust (BDIT)

The Beneficiary Defective Inheritor’s Trust (BDIT) allows you to retain control over property transferred to the trust while freezing the value that is included in your estate. With a BDIT, the creator of the trust is someone other than you, typically a parent, who contributes a small amount of cash to fund the trust. You can be a trustee of the BDIT and, after it is established, can sell assets to the BDIT. The assets sold to the trust can be removed from your estate and potentially have creditor protection even though you retain control and are a limited beneficiary of the trust.

6. Intra-family loans

Loans between family members should be considered given historically low interest rates. Existing intra-family loans should be reviewed and refinanced if possible.

Although these are not new techniques, low interest rates and low valuations provide a unique opportunity to transfer wealth now at a very low gift tax cost. Contact an estate planning attorney at McDonald Hopkins to review your situation and determine if one of these options would work for you.

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