The coronavirus pandemic has disrupted our daily lives and caused major health concerns but, as you are undoubtedly aware, it has also significantly impacted our economy. This impact, while negative on its face, presents a unique opportunity from a wealth transfer planning perspective.
Previous articles that provided a general overview for US persons -
Gifts: Gift an undervalued asset, such as stock or real estate, to children and more remote descendants. You will transfer all of the future appreciation on the gifted asset free from transfer tax—including any undervaluation discount attributable to market influences. You will leverage the use of your exemptions and/or pay less gift tax.
Trusts: Use trusts to hold assets for the benefit of your children or more remote descendants. A trust provides creditor protection, allows for asset management and control, preserves tax benefits and, if structured as a “grantor trust,” allows you to make what effectively amounts to tax free gifts to the trust beneficiaries by your being responsible for paying the income tax attributable to trust assets.
GRATs and Sales to Trusts: Select an undervalued asset, preferably one that has a high potential for appreciation, and contribute it to a grantor retained annuity trust (a GRAT) or sell it to a grantor trust in exchange for a promissory note. Using either technique, the transfer is structured so there is little to no transfer tax consequence. The fair market value of the asset on the transfer date, plus an assumed rate of return (in the case of a GRAT) or a fixed interest rate (in the case of a sale), is returned to you over time, either in the form of annuity payments or note repayments. To the extent the transferred asset outperforms that rate, value passes to the trust with no transfer tax consequence. The applicable federal assumed rate of return and loan interest rates change monthly and are all currently less than 1.5%. Read more here - https://www.mooresrowland.tax/2020/04/funding-grats-in-market-decline.html
Loans: Loan assets to a grantor trust. As long as the asset in the trust outperforms the interest rate on the note, value passes to the trust without any transfer tax consequence. Refinance existing intra family loans to take advantage of lower interest rates, so that family members and trusts benefit more from those loans. As stated above, the applicable federal loan interest rates change monthly and are all currently less than 1.5%.
Are your documents up-to-date?
During these unprecedented times, it's of utmost importance to ensure that all your estateplanning documents accurately reflect your wishes.
Signed documents to safeguard as hard copies:
Will. This important set of instructions directs assets that you own individually (with no beneficiary designation), can designate a guardian for minors, and appoints an executor to administer your estate after you pass. Keep the signed original in a secure place, like a safe deposit box, that’s known to people who will need access to it, such as an executor or close family members.
Power of attorney (POA) for financial matters. This POA names someone you trust as the person to help manage your financial affairs. It could be structured to become effective at the time you sign it or could be triggered to take effect upon becoming incapacitated.
Durable power of attorney for health care. This POA appoints an agent to make medical decisions for you if you can’t make them yourself.
Health Insurance Portability and Accountability Act (HIPAA) release authorization. As a stand-alone document or as part of other documents, such as a durable POA for health care, this privacy-related document allows you to explicitly declare who should have access to your important medical information.
Living will. Also called an advance directive, these instructions dictate your wishes about prolonging your life in cases like a terminal illness or if you’re in a permanent incapacitated state.
Revocable living trust. Like a will, this document also directs how your assets will pass to your beneficiaries, but it may be funded during your lifetime and can provide for incapacity planning, as well. A revocable trust can provide some benefits that you wouldn’t typically get with a will, with more privacy and without the costs and hassle of probate court.
Documents that you can keep in a digital format:
Current net worth statement. This lists all of your assets and liabilities and what they’re worth. You could even include how various assets are titled. A net worth statement can be a big help in the process of getting organized, reveal the true scope of your estate, and provide your advisors with a very useful tool as they work to put together a customized plan for you. It can also save your successors significant work in figuring out all that you have. Keep this document updated so that it reflects current information about all of your accounts, real estate, liabilities, and other items.
List of professional advisors. Includes contact information for important advisors, such as your financial advisor, attorney, CPA, insurance agents, and doctors.
Medical condition record. This is an informal way to let your trusted agent know about your health status when there’s a need.
A guide to these documents (both physical and digital). Those you’ll leave behind will appreciate a simple catalog of all the estate-planning documents you’ve prepared and their locations so they can find them without hassle.