We know it is hard to imagine an upside to the COVID-19 health crisis or the economic damage that has ensued. Our sincere compassion extends to everyone impacted by the Coronavirus and the measures taken to stop it from spreading.
From an estate planning perspective, however, the Coronavirus-induced bear market presents several wealth opportunities for families with large estates. Let us share a few key pieces of information for you on this important planning consideration.
1. Depressed Asset Values. The recent economic downturn has been accompanied by a stock market devaluation. While the market is ticking upward, many tangible assets and paper investments are worth less than they were pre-COVID. This presents an opportunity to transfer assets to family members or trusts to reduce taxes. When you transfer assets, their value is essentially frozen for estate and gift tax purposes. So transferring them when they are undervalued creates tax savings once the value of the assets appreciate during a future market rebound, and beyond. Not only will your family members benefit, but your estate will have a lower overall taxable value if it is above an exemption limit.
2. Gift Tax Exclusion. The gift tax exclusion allows you to give away up to $15,000 a year to as many people as you wish without those gifts counting against an $11.58 million lifetime exemption. That limit is scheduled to drop to $6 million on January 1, 2026, and a change in presidential administrations in November will almost certainly lead to a reduction prior to 2026. In 2016, for example, a lifetime gift tax exemption of $3.5 million was under consideration. Gifting assets to heirs while the exemption is high and while assets values are low is a great strategy to maximize current financial conditions.
3. Low Interest Rates. The IRS uses the applicable federal rate (AFR), or the 7520 Rule, for loans between private parties, like family members. Right now, AFRs are at an all-time low. For April 2020, short-term AFR is only 0.91 percent, whereas in April 2019 short-term AFR was 2.52 percent. Mid-term and long-term rates are similarly advantageous. In other words, if you make a loan to a family member at an all-time low interest rate, and they invested the loan and benefitted from future market gains, then the investment proceeds could escape estate and gift taxes normally applied to wealth transfers between family members.
We know this article raises more questions than it answers. We also know that considering new estate planning strategies means that you need to discuss this with your estate planning attorney. Do not wait to contact us and schedule a meeting with attorney Alan Hougum to learn more about how current financial conditions can help you lower your tax exposure and achieve your estate planning goals.