Preservation | Family Wealth Protection & Planning

During times of a robust economy and increasing portfolio balances, many grasp the importance of implementing planning strategies to shift wealth in a tax-efficient manner to the next generation. However, uncertain economic times can also present opportunities not only to reevaluate existing planning, but also to implement additional, alternative planning that in the long run could provide significant estate, gift, and income tax benefits.

With the COVID-19 pandemic, we have seen a significant impact on the U.S. economy that has translated to record unemployment and a significant drop in the market. Despite the current depressed asset values, such values have the potential to rebound. However, only time will tell the long-term impact of the pandemic.

With the current economic uncertainty, the Treasury has responded with a steady decline in interest rates. In particular, the lowest interest rate that may be charged on a loan without causing negative gift tax consequences, the Applicable Federal Rate (AFR), has dropped to a historic low. In January 2020, the mid-term AFR (for loans more than three years and up to nine years) was 1.69 percent. The mid-term AFR for July 2020 is 0.45 percent. The AFR is commonly used for such things as intra-family loans, but it is also used to determine the rates for other planning tools, like Grantor Retained Annuity Trusts. The lower the AFR, the greater the opportunity for planning.

As part of the 2017 Tax Cuts and Jobs Act (TCJA), the lifetime transfer (estate, gift and Generation-Skipping Transfer (GST)) tax exemptions doubled from $5 million plus inflation, to $11,580,000 per individual in 2020. However, built into that legislation was an automatic sunset that will result in the estate, gift and GST tax exemptions dropping back down to pre-TCJA levels beginning Jan. 1, 2026. These transfer tax exemptions could be decreased even sooner in response to the current economic decline or the outcome of the November election. As such, the risk of the higher transfer tax exemptions disappearing creates a higher level of urgency for individuals to implement estate planning techniques that utilize the exemptions while they are still available.

To further explain what planning options may be advantageous to individuals during these uncertain times, this blog series will cover several planning strategies that should be considered in light of current depressed asset values, low AFRs and the possibility of the higher transfer tax exemptions decreasing to prior levels. Each installment will provide details on a planning strategy relevant to the current environment, including intra-family loans, Grantor Retained Annuity Trusts, closely held business planning strategies, installment sales in low interest rate environments and charitable giving. To make sure you do not miss any of these timely and relevant topics, please subscribe to blog updates.

Link to COVID-19 Resources page