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 –
Non resident aliens / non US persons –
More advanced topics for US persons –
4 things to think about –
- 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 estate planning documents accurately reflect your wishes.