Client Alert: Unique Estate Planning Opportunities Available Now

Client Alert: Unique Estate Planning Opportunities Available Now

Certain aspects of the current economic environment allow for unique planning opportunities that are not available during more usual times.  The following factors combine to present these unprecedented estate planning opportunities:

1. Historically High Gift/Estate Tax Exemptions. Generally speaking, transfers to your loved ones (other than a spouse) during your life or at your death are subject to federal gift or estate taxes.  All US citizens have an exemption from these taxes, which is now at an historically high $11,580,000.  Importantly, this exemption amount is currently scheduled to be reduced by approximately half on January 1, 2026.  However, a change in political control of the federal government prior to 2026 would also likely result in reductions of these historically high exemptions, or they may be reduced in order to raise revenue for the federal government.  This means that making large gifts at this time may be desirable to use the current historically high exemption before it is no longer available.
2. Historically Low Interest Rates. The Federal Reserve has reduced interest rates to essentially zero.  Certain trusts work very well in low interest rate environments as discussed in more detail below.
3. Reduced Asset Values. The value of many financial assets (such as marketable securities) have declined from their February 2020 highs.  Because gifts of these assets are taxed on their values at the time of the transfer, it is now cheaper to transfer assets with a currently reduced value than it was before the pandemic.

In this Client Alert, we list ten estate planning techniques you may wish to consider during the current environment.  Not every technique may be helpful for you.  Our firm’s Trusts and Estates attorneys can review your and your family’s particular situation to see if you can benefit from these techniques, as well as others not listed here.  Every estate plan we draft is custom-tailored to our clients’ unique needs and goals, which may have changed in light of the current pandemic.

The estate planning opportunities discussed below should be built upon a well-drafted basic estate plan, which includes a Will and/or a Revocable Trust, a Power of Attorney, Health Care Proxy and Living Will.    A previous Client Alert, which can be found here, reviews the importance of a basic estate plan and how it can be implemented even while social distancing is required.

Ten Estate Planning Opportunities to Consider Now:

1. Grantor Retained Annuity Trusts (“GRATs”). GRATs are structured so that the creator of the GRAT transfers assets to a trust and retains the right to receive payments back from the trust over the trust term.  If the assets transferred to the trust appreciate in value beyond the amount of the payments back to the creator and an interest rate set by the IRS (the “hurdle rate”), this appreciation passes to your beneficiaries free of transfer tax.  GRATs are particularly attractive now because in this low interest rate environment the hurdle rate is very low and the expected economic recovery may lead to significant appreciation of assets above their current values.  There is currently political opposition to GRATs, which means that GRATs could be significantly curtailed in the future if there is a change in political control of the federal government.  This suggests proceeding now if it makes sense for your current situation.
2. Spousal Lifetime Access Trusts (“SLATs”). In this time of economic uncertainty, it is understandable that losing the ability to access gifted assets may be undesirable.  For married clients, SLATs couple the advantages of making gifts at this time (i.e., using your gift tax exemption before it is reduced) while retaining the ability to indirectly access the assets transferred to the SLATs.  SLATs accomplish this by providing that your spouse is the beneficiary of the SLAT and can receive assets from the SLAT during your lifetime.  Your spouse can also create a SLAT for you, although the SLATs established by you and your spouse cannot have identical provisions.
3. Domestic Asset Protection Trusts (“DAPTs”). Another way to take advantage of making gifts now without losing control of those assets is by creating a DAPT.  DAPTs allow you to set up a trust for your own benefit, while protecting the assets in the trust from your creditors and taking advantage of gifting during this time.  DAPTs must be established in one of the 19 states that currently allow them (New York is not one of these states), but DAPTs can be established by residents of other states.  There are many variations of DAPTs that can be used to address your specific needs.
4. Life Insurance Trusts. Life insurance is included in your estate for estate tax purposes at the face value of the policy.  Creating a trust to own any life insurance you may have can remove this amount from your estate, which may be prudent planning at this time because the estate tax exemption amount will be coming down (as discussed above).  It is preferable to transfer existing policies to such a trust as soon as possible because existing policies transferred to trusts are included in your estate for the three years following the transfer.
5. Annual Exclusion Gifts. Current law allows you to make gifts of $15,000 ($30,000 if you are married and your spouse consents to the gifts) to as many people as you choose without reducing your lifetime gift/estate tax exemption.  Making these gifts now will allow your beneficiaries to purchase assets with depressed asset values and receive the benefit of the appreciation of those assets going forward.  You can also make gifts of assets with currently depressed values that you believe will appreciate.
6. Gifts of Closely Held Businesses. If you own a closely held business that has recently experienced a decline in sales, this may be the right time to make gifts of ownership in that business, because the gifts are valued at the time of transfer and the value of your business may be significantly reduced at this time.  Also, if there is a change in political control in Washington it is likely to bring about restrictions on planning opportunities for transfers of closely held businesses.
7. Low Interest Loans. The tax code generally requires you to charge a minimum amount of interest on a loan.  Because of the low interest rate environment, the minimum required interest rate on a loan is historically low.  Therefore, it may be a great time to make a loan to a loved one, who could purchase investment or personal assets (such as a home) while prices are reduced.  This technique also applies to “selling” assets to a trust in exchange for a promissory note.  This technique usually involves a specialized trust called an Intentionally Defective Grantor Trust.
8. Maximizing Use of the Current GST Tax Exemption. The current economic environment also offers planning opportunities with respect to the generation-skipping transfer tax (the “GST tax”).  The GST tax is a federal wealth transfer tax in addition to the gift/estate tax on transfers to grandchildren or other persons more than one generation below you. Like the federal gift/estate tax, the current GST tax exemption is currently historically high and is slated to be reduced in 2026, if not before for the reasons mentioned above.  If you currently have trusts set up, you may be able to use your GST tax exemption without transferring any additional assets.  Accordingly, it is a good time to provide for your grandchildren by creating what is commonly known as a Dynasty Trust.
9. Roth Conversions. Withdrawals from “traditional” retirement accounts are generally subject to income tax, while withdrawals from Roth retirement accounts are not. Converting “traditional” retirement accounts to Roth accounts will result in inclusion of the converted amount in your taxable income for the year of the conversion, but later withdrawals from the converted Roth account will be income tax free.  Converting traditional retirement accounts to Roth accounts may be advantageous in the current environment because: (i) asset values are lower and conversions will be taxed on this lower amount; (ii) current income tax rates are historically low and are expected to rise in the future to meet the federal government’s revenue needs, and (iii) you may have reduced income in 2020.  When reviewing your estate planning for your retirement accounts, it is also important to keep in mind the recent changes as a result of the SECURE Act, which we have addressed in a previous client update which can be found here.
10. Charitable Donations. The recently passed CARES Act expands the availability of income tax deductions for charitable contributions in several ways.  You may wish to consider making charitable contributions at this time, which can result in additional tax benefits to you while providing a helping hand during the current crisis.  Clients with retirement accounts can also make Qualified Charitable Distributions directly from those accounts to charities, which can increase the tax benefits of doing so.

We look forward to assisting you with creating your estate plan or re-evaluating any estate planning you may have done. Please feel free contact any of our estate planning attorneys listed on our firm’s Trusts and Estates Department website to review your plan.