Author: Sol S. Reifer, JD, LL.M-Estate Planning, Accredited Estate Planner
The rapidly evolving coronavirus (COVID-19) crisis is creating a plethora of unique estate planning and legal challenges across the globe, particularly given the volatility of the financial markets. It also creates some unique opportunities in wealth planning. To learn more about some strategies you may wish to consider recommending the following tools to your high net worth clients.
Transfer Tax Planning
Basic Estate Planning
Now more than ever we need to focus on our wellbeing and that of our families. As part of this process you should request counsel to review your clients’ current estate planning documents to ensure that they at least have the basic documents in order (Wills, Revocable Trusts, Powers of Attorney, beneficiary designations and health care directives) and that these documents reflect their current wishes.
If your clients’ documents have not been reviewed since the 2012 American Taxpayer Relief Act or the 2016 Tax Cuts and Jobs Act, then their estate plan is stale! Clients with substantial retirement portfolios need to also revise their estate plan to ensure the trusts named as beneficiaries of their IRAs or qualified plans are in compliance with the 2020 SECURE Act.
Efficient Wealth Transfer Strategies
Given the volatility of the financial markets, depressed asset values and historically low interest rates you should consider this an opportune time to transfer wealth to your intended beneficiaries. Below is a brief outline of a few strategies you might want to consider recommending to your high net worth clients.
In a low interest rate environment planning techniques involving intra-family transactions where the senior family member lends or sells assets to junior family members are very effective because the loaned or sold assets only need to appreciate at a rate greater than the interest rate charged. In such cases, the appreciation above the interest rate charged passes to junior family members or trusts for their benefit transfer tax free. Further, the value of the assets remaining in senior family member’s estate will be frozen at the loan/purchase price. The value of the loaned or sold assets will be based on a fair market value valuation, which may include discounts for certain factors. Given current market conditions, we anticipate the fair market value of many assets will be extremely depressed and discounted. Should you put one of these intra-family strategies into place, when asset values rebound all that appreciation will be outside of your clients’ taxable estate and will be held by or for the benefit of your clients’ intended beneficiaries transfer tax free.
Grantor Retained Annuity Trusts
The use of a Grantor Retained Annuity Trust (a “GRAT”) allows your client, the Grantor, to contribute assets into a Trust while retaining a right to receive, over a term of years, an annuity stream from the Trust. When the term of years expires, the balance of the assets held in the Trust pass to your clients intended beneficiaries. The IRS values the ultimate transfer of assets to your clients’ intended beneficiaries (i.e., the gift being made) based on the value of the annuity stream your client retains and an assumed rate of return on such assets. The assumed rate of return is proscribed by the IRS (and is commonly known as the 7520 rate). The current 7520 rate is 1.8%. As such, if your client retains the right to receive an annuity stream from the Trust equal to the value of the assets contributed plus a 1.8% rate of return, any assets remaining in the Trust at the end of the term, will pass to your clients intended beneficiaries transfer tax free (this is known as a “zeroed-out GRAT”). If the assets outperform the 1.8% assumed rate of return, all such excess will escape estate taxation. Again, given this low hurdle rate and depressed asset values, GRATs should be seriously considered by anyone looking for an effective way to transfer assets to younger generations.
Charitable Lead Annuity Trusts
If your clients have any charitable inclinations, they may want to consider a Charitable Lead Annuity Trust (a “CLAT”). Similar to a GRAT, in a CLAT, your client, as Grantor, transfer assets to a Trust in which a charity is designated to receive an annuity stream for a term of years. At the end of the term of years, the balance of the assets remaining in the Trust pass to the beneficiaries your client indicates in the Trust Agreement. As with a GRAT, it is possible to structure a CLAT such that the balance of the Trust assets pass to your clients’ intended beneficiaries transfer tax free. The value of the assets ultimately passing to your clients’ intended beneficiaries (i.e., the value of the “gift,” if any) is determined by subtracting the value of the annuity stream the charity receives from the value of the assets at the time the CLAT is funded. The value of the annuity stream passing to the charity is also affected by the 7520 rate – the lower the 7520 rate, the higher the present value of the annuity passing to the charity. As with all the previously discussed strategies, depressed values and the low-interest rate environment result in more assets passing to your clients’ intended beneficiaries transfer tax free.