Estate and tax planning ideas for a COVID-19 economy

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The depressed values in the markets, low interest rates and historically high federal estate, gift and generation-skipping transfer tax exemptions have created some excellent opportunities for you to make impactful gifts to your family and generate potentially significant tax savings. The following are eight wealth planning tools you may want to consider.

  1. Create GRATs and CLATs: Grantor-retained annuity trusts and charitable lead annuity trusts shift appreciation in excess of the Section 7520 interest rate to the next generation. The May 2020 rate is an incredibly low 0.8%, which means more can be transferred to beneficiaries with no gift or estate taxes.
  1. Take advantage of the historically high federal exemptions: The coming months are the perfect time to make large gifts as the high federal estate, gift and generation-skipping transfer tax exemption amounts will sunset after Dec. 31, 2025. These exemptions could drop significantly as early as next year, depending on the outcome of this year’s election.
  1. Give away assets that have depressed values: While asset values are low, consider giving them to your children or grandchildren or create trusts for their benefit, thereby sheltering the gift with your unused and currently high federal transfer tax exemptions.
  1. Create a SLAT: If you are concerned about giving too much to your children or grandchildren and not having enough left to provide for your spouse, establish a spousal lifetime access trust with your spouse, children or grandchildren as beneficiaries. The gift to the SLAT removes assets from your estate, and the gift can be sheltered from gift tax by utilizing the high federal exemption during your lifetime.
  1. Make gifts to grantor trusts: Rather than giving assets outright, give them to a grantor trust. Because you will pay the income taxes on the trust’s income rather than using trust assets to pay the taxes, the trust grows tax-free.
  2. Sell property to a grantor trust: Selling property to a grantor trust using an installment loan takes advantage of low values and low interest rates and can shift significant appreciation to children and grandchildren free of transfer taxes.
  3. Review your current GRATS or previous sales to grantor trusts: If you have previously created a GRAT or sold assets to a grantor trust in exchange for a promissory note, the GRAT or sale transaction may not be working as intended. With the current depressed value of the GRAT’s assets, consider substituting cash, other assets or even a promissory note for those assets so you can start over.
  1. Make or refinance intra-family loans: These loans also offer benefits when interest rates are low. So as not to trigger gift taxes, these loans must bear interest at a rate at least equal to the Applicable Federal Rate, but these rates are much lower than rates on loans from financial institutions.

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