Notes to Know: Estate Planning Strategies to Capitalize on the Pandemic

Updated: Jul 6, 2020

"If I'd have had more time, I'd have written a shorter letter" ~Blaise Pascal

This note is summarized from a recent article by Alvina Lo in the April 2020 issue of Wealth Management magazine entitled, “Positive Planning Strategies in a Post-COVID-19 World.”

Estate Planning Strategies to Capitalize on the Pandemic

This pandemic has brought about the convergence of three unique conditions that lend themselves to some positive planning opportunities:

  • High Federal lifetime gift-tax exemptions

  • Low-Interest Rates

  • Reduced Asset Values

While the current gift tax exemptions ($11.58mm for individuals, $23.16mm for married couples) are set to revert back to $5mm (adjusted for inflation) in 2026, the current environment may make acting now appropriate for those who wish to maximize their gifts to non-charitable beneficiaries. IF your goal is to maximize the gifts you make to future generations, gifting today may make sense as gift exemption limits are high and asset values are low. Gifting these reduced value assets uses less of your exemption and gives your beneficiaries the potential to benefit from an asset that appreciates out of these recessionary prices.

NOTE: These strategies are complex and will not apply to every person. If you wish to explore them, please contact your Cascade Advisor, and work together with the appropriate tax and estate professionals!

Gift Depreciated Assets:

  • Many assets, such as stock portfolios, private company holdings, or real estate investments have declined in value.

  • Thus, it uses less of your exemption to directly gift these currently.

  • This is useful if you expect the asset to appreciate substantially in the future and wish to maximize the transfer of value to heirs.

Gift to a Trust:

  • For large gifts, you may wish to use a trust rather than an outright gift.

  • Numerous trust structures are available, including grantor trusts, which are disregarded for income tax purposes.

  • In a grantor trust, the grantor retains responsibility for the income tax associated with the trust.

  • Effectively, the income tax paid by the grantor is another gift to the trust, which does not use the grantor’s gift tax exemption

Take Advantage of Low-Interest Rates:

Many planning strategies rely on an interest rate set by the IRS, known as the “7520 Rate”. A low rate can be useful in certain types of planning, and the rate is currently set to be 0.60% in June of 2020 (as shown on the table here). Some ways to capitalize:

Consider a gift to a Grantor Retained Annuity Trust (GRAT):

  • This is a complex strategy that carries with it multiple types of risks and should only be considered with a competent professional team.

  • For assets expected to appreciate at a rate substantially higher than the 7520 rate, this may be appropriate as the additional growth may transfer to beneficiaries free of gift and estate taxes.

  • The extremely low-interest rate makes this strategy timely to consider.

Intrafamily loans:

  • Properly structured, intrafamily loans can provide attractive lending rates without gift tax consequences.

  • To avoid treatment as a gift, the loan must be properly structured and must bear interest at least equal to the “applicable federal rate” (AFR) as set by the IRS found here.

  • These rates are currently very low, so it is possible that an investment made by the recipient of those funds will exceed the AFR, and those earnings would be transferred estate and gift tax-free.

  • This may also serve the “lender” as a use for idle cash, as the AFR may be higher than current rates available elsewhere.

  • It’s always a good idea to incorporate your estate planning professional in the structuring of intrafamily loans.

Use Tax-Loss Harvesting:

Often only considered as a year-end strategy, tax loss harvesting may be beneficial in any market downturn as long as you know the rules:

  • Positions may be sold to recognize tax losses, and the losses used to offset current or future capital gains.

  • Losses may be carried forward to future years, up to the point of the owner’s passing. Unused losses expire at the death of the owner.

  • You can’t buy the “same or substantially the same” security within 30 days, either before or after, the transaction in which you recognize the loss. Doing so creates a “wash sale” and the loss is no longer deductible.

  • There are numerous strategies for maintaining similar yet materially different exposure to an asset class while avoiding the wash sale trap. Consult your advisor for strategies.

Revisit your Entire Plan:

IN SHORT-The pandemic has provided several opportunities that can be utilized within a comprehensive financial plan. Meet with your team of experts to make sure to take fullest advantage of all the options!

Make It a Great Day!

The information contained within is the view and opinion of the author as of the date it was written, and not necessarily of Cascade Financial Management, Inc. Such views are subject to change without notice. Cascade has no duty or obligation to update the information contained herein.

This is for educational purposes only and should not be used for any other purpose. It is not intended as planning or tax advice for any individual or entity. It does not constitute and should not be construed as an offering of advice or an offer to sell, or a solicitation to buy any services or related financial instruments or advice of any kind. Your tax and financial situation is unique and you should not take any action or make any investment decision without first discussing your particular situation with your CPA, tax, or legal advisor.

Certain information contained herein concerning economic trends and performance is based on or derived from, information provided by independent third-party sources. Cascade believes the sources from where this information has been obtained are reliable, however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

Any distribution, use, or copying of this information by anyone other than the intended recipient is unauthorized.

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