It is not breaking news that many financial investments and bank accounts have taken a hit as a result of the global spread of Coronavirus. According to most predictions, it is likely to take some time for the markets to rally and the economy to pick up again. This presents an opportunity for some taxpayers, who might be able to take advantage of certain estate planning strategies as a result of the economic climate:
Refinance any loans or debt.
Low interest rates make it a great time to refinance. This includes mortgages, car loans, bank loans, and even loans to family members. Refinancing your loan will result in lower monthly payments and less interest paid over the life of the loan.
Gift assets while the values are low.
Giving away assets is always a good idea if you expect you’ll have a taxable estate. In 2020, and individual taxpayer can give up to $15,000 per recipient with no tax consequences. A married couple can gift up to $30,000. The current annual federal estate tax exclusion is $11.8 million for an individual, and $23.8 million for a married couple. Under the federal Tax Cuts and Jobs Act of 2017, the exclusion is scheduled to go back to the 2017 level - $5 million for an individual, adjusted for inflation - on January 1, 2026.
When you give a gift while the asset value is low, you are essentially saving money. This is because the value of the gift is likely to increase over time, benefiting the recipient in the long-run.
Take advantage of low interest rates and low asset values with a GRAT.
A Grantor Retained Annuity Trust is an irrevocable trust that an individual (the grantor) funds with assets he or she expects will appreciate in value over time. It is a gamble, but because many stocks have depreciated in value it is a safer bet than usual.
The grantor retains the right to an annuity from the GRAT for a certain number of years. The annuity is calculated by applying an interest rate the IRS sets monthly, called the section 7520 rate, to the value of the assets in the GRAT. The rate is currently low, which also makes this vehicle favorable because the interest rate affects the value of the transfer for tax purposes. When the term of the GRAT ends, any assets that remain are distributed to the beneficiaries of the trust.
The grantor can set the annuity amount to be equal to the section 7520 interest rate, which would effectively return all of the assets to the grantor in the form of the annuity payments. While a transfer to a trust for the benefit of someone else would normally be considered a taxable gift, the fact that all of the assets could come back to the grantor makes the gift have a zero, or close to zero, value.
The plan is for the grantor to survive the term of the GRAT and for the assets to appreciate in value beyond the amount of the 7520 rate. The result of this is a tax-free gift, where the beneficiaries end up with the underlying assets at their value.
Make additional donations to support causes you care about.
Under the federal CARES Act, which was signed into law at the end of March, a taxpayer can get a federal income tax deduction for charitable contributions of to 100 percent of their adjusted gross income. The goal was to encourage people to donate to COVID-19 related causes. The provision increases the maximum of 60 percent to 100 percent for 2020. This 100 percent limit applies only to direct, cash contributions to charities. It does not apply to contributions to donor advised funds, supporting organizations, or private foundations.
Beyond the 100 percent amount, donations can be carried forward for five years, subject to the limit of 60 percent of adjusted gross income. A charitable lead trust (CLT) can also be used to support a charity. This type of irrevocable trust is set up to support the charities for a certain amount of time, with the remainder going to family members or other selected beneficiaries.