Although estate planning may not be at the top of your mind, the current market environment presents a number of unique wealth transfer opportunities for individuals who could be subject to federal or state estate taxes. Here are a few strategies that you may wish to consider incorporating into your estate plan.
Lifetime gifts can remove both the value and any future appreciation of the asset from your taxable estate and in turn reduce your potential estate tax liability. Currently, the lifetime gift and estate tax exemption is $11.58 million per person (for married couples a combined $23 million). This means you can gift up to $11.58 million over the course of your life without paying gift tax. However, this exemption is scheduled to revert back to $5 million (indexed for inflation) at the end of 2025 and could be reduced sooner depending upon legislative changes. The current market environment presents you with the unique opportunity to leverage this exemption by gifting assets (securities, real estate or business interests) while the values are depressed. When the asset values recover the appreciation would then be shifted out of your taxable estate thereby passing to your heir gift and estate tax free.
You can also make an annual gift of up to $15,000 per person (for married couples a combined $30,000) without incurring any gift tax or eating into your lifetime gift and estate tax exemption. If you want to make a gift, consider taking advantage of the market pull back by gifting low value stocks in lieu of cash. Keep in mind it will be important to consider the basis of the gifted shares, to ensure the overall income and estate tax effect is minimized.
When interest rates are low and assets are declining in value, making a loan or selling an asset to your family members can be an effective wealth transfer strategy as the asset only needs to appreciate at a higher rate than the interest rate charged. To avoid gift tax consequences, it is generally advisable to charge a minimum interest rate known as the applicable federal rate (AFR). However, this rate is often much lower than rates charged by commercial lenders. When the asset value rebounds the appreciation in excess of the interest paid would be received by your family member free of gift and estate taxes.
Historical Applicable Federal Rates (AFRs)
Grantor Retained Annuity Trusts
A grantor retained annuity trust (GRAT) can be a powerful tool in the current market and interest-rate climate. A GRAT allows you to transfer assets to an irrevocable trust and retain the right to receive a fixed annuity payment each year for the term of the trust after which the remaining trust property passes to the beneficiaries. The annuity payment can also be structured so that the present value is equal to the value of the assets contributed plus an IRS assumed rate of return (Section 7520 rate) resulting in minimal gift tax consequences (this is known as a zeroed-out GRAT). If the assets outperform the interest rate then the excess appreciation will escape gift and estate taxation.
A GRAT basically allows you to give away the appreciation of an asset yet retain the income and management of the asset for a period of time. This type of wealth transfer vehicle is a good option for someone who either needs or is concerned with retaining income. Again, the economy is currently experiencing low Section 7520 rates along with depressed asset values, so you may wish to consider establishing a GRAT now as the hurdle rate to transfer appreciation is historically low.
Historical Section 7520 Rates
Charitable Lead Annuity Trust
If you have charitable intentions, consider a charitable lead annuity trust (CLAT). A CLAT is similar to a GRAT, however, a charitable organization receives the annuity payments rather than an individual. After the specified term is over, the remaining trust assets then pass to your heirs. Depending on the structure of the trust, you may also receive a charitable tax deduction based on the present value of the annuity payments and the IRS assumed rate of return (Section 7520 rate). Similar to a GRAT, if the assets appreciate beyond this rate the excess will pass to the beneficiaries tax-free. Therefore, this strategy works best in a low-interest rate environment since there is a greater chance that the growth of the assets will exceed the interest rate.
Wealth transfer strategies are not one size fits all. The decision about which strategy to implement will depend upon your overall wealth transfer plan. Given the uncertainty of this time, it may be difficult to consider your estate plan or advanced wealth transfer strategies. However, if you are in a position to transfer wealth now, we have deep expertise in this area and would be happy to discuss these strategies along with other more complex strategies to see if they would accomplish your wealth transfer goals.
MEET THE AUTHOR
Senior Financial Planner
Tawny Hubbard, CFP®, CPA
Tawny specializes in developing and implementing comprehensive financial plans that provide clients the best opportunity to achieve their cash flow, investment, insurance and estate planning goals. Prior to her career in financial planning, she concentrated on strategic tax planning and compliance for high-net-worth individuals. Tawny received a Bachelor of Science degree in business administration with…
- Financial planning
- Wealth management
- High-net-worth individuals
- Certified Public Accountant
- CERTIFIED FINANCIAL PLANNER™