Pandemic downturn opens estate-planning opportunities

It’s not new news that many financial investments and bank accounts have taken a hit as a result of the global spread of coronavirus. According to most predictions, it’s likely to take some time for the markets to rally and the economy to pick up again.

But there is a silver lining for some taxpayers, who might be able to take advantage of certain estate-planning strategies as a result of the economic climate. Talk to an estate planning attorney to find out if any of these strategies would benefit you.

Gift assets while the asset values are low.

Giving away assets is always a good idea if you expect you’ll have a taxable estate. In 2020, an individual taxpayer can give up to $15,000 per recipient with no tax consequences. A married couple can gift $30,000.

Currently the annual federal estate tax exclusion is $11.58 million for an individual and $23.16 million for a married couple. Under the federal Tax Cuts and Jobs Act of 2017, the exclusion is scheduled to go back to the 2017 level — $5 million for an individual, adjusted for inflation— on Jan. 1, 2026.

When you give a gift while the asset value is low, you essentially get more bang for your buck. That’s because the value of the gift is likely to increase over time, benefiting the recipient in the long-run.

Let’s say you bought shares of a company’s stock at $50/share and the value increased to $100/share. However, let’s assume that in the recent downturn the value went back down to $50/share. Today, you can give your child 300 shares of the stock, for a total of $15,000 in value, with no impact on your lifetime exclusion amount. Had the stock kept its value, you would have only been able to give half that amount.

Take advantage of low interest rates and low asset values with a GRAT. 

A Grantor Retained Annuity Trust (GRAT) allows you to take advantage of low interest rates while taking money out of your estate by gifting assets.

A GRAT is an irrevocable trust that an individual (the grantor) funds with assets he or she expects will appreciate in value over time. It’s a bit of a gamble sometimes, but currently many stocks have depreciated in value, so putting stock in a GRAT could be a safe bet.

The grantor retains the right to an annuity from the GRAT for a certain number of years. The annuity is calculated by applying an interest rate the IRS sets monthly, called the section 7520 rate, to the value of the assets in the GRAT. The rate is currently low, which also makes this vehicle favorable because the interest rate affects the value of the transfer for tax purposes.

When the term of the GRAT ends, any assets that remain are distributed to the beneficiaries of the trust.

The grantor can set the annuity amount to be equal to the section 7520 interest rate, which would effectively return all of the assets to the grantor in the form of the annuity payments. While a transfer to a trust for the benefit of someone else would normally be considered a taxable gift, the fact that the all of the assets could come back to the grantor makes the gift have a value of zero, or close to it. This is known as a zeroed-out GRAT.

That is where the grantor is taking a gamble. He or she is really expecting to survive the term of the GRAT and planning for the assets in the GRAT to appreciate in value beyond the amount of the 7520 rate.

The intended result, then, is a tax-free gift, where the beneficiaries end up with the underlying assets at their value. That’s why this is a great vehicle when the 7520 rate is low.

Make additional donations to support causes you care about.

Under the federal CARES Act, which was signed into law at the end of March, a taxpayer can get a federal income tax deduction for charitable contributions of up to 100 percent of their adjusted gross income. The goal was to encourage people to donate to COVID-19 related causes. The provision increases the maximum of 60 percent to 100 percent for 2020.

This 100 percent limit applies only to direct, cash contributions to charities. It does not apply to contributions to donor advised funds, supporting organizations or private foundations.

Beyond the 100 percent amount, donations can be carried forward for five years, subject to the limit of 60 percent of adjusted gross income.

A charitable lead trust (CLT) can also be used to support a charity or charities. This type of irrevocable trust is set up to support the charities for a certain amount of time, with the remainder going to family members or other selected beneficiaries.

Refinance any loans or debt.

Low interest rates make it a great time to refinance. That applies to anything from mortgages to loans made to family members.

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