Wealth Transfer Options to Consider Now
Updated: Sep 21
Keeping up with the rapidly evolving pandemic news can be confusing and exhausting. The markets are volatile, asset values are depressed and business valuations are historically low. But this does not mean you should wait to address your estate planning. Now is the time to take action.
Current market conditions have created great opportunities to maximize certain wealth transfer techniques. Addressing these strategies now may provide additional value to your beneficiaries at a lower transfer tax cost to you. A few examples are listed below:
Sale to a Grantor Trust
How It Works: You sell assets (stocks, business interests, real estate, etc.) to a trust in exchange for a promissory note payable to you for a term of years. When the promissory note has been fully paid, the assets remaining in the trust will pass to the trust beneficiaries free of estate, gift and generation-skipping transfer taxes.
Why Now? Currently, the applicable federal interest rates are very low (Sept 2020 mid-term AFR is 0.35%), which means less interest is paid out of the trust and more assets remain in the trust for your beneficiaries. Also, if the value of your business and investments are depressed and are likely to recover from the recent economic downturn, this transaction may allow you to capture transfer tax-free appreciation.
Gift to a Trust
How It Works: You gift assets in trust for beneficiaries, instead of directly to them. The trust allows you to set the rules as to how and when the gifted assets can be used. Also, the trust can include terms that help protect the gifted assets from a beneficiary’s potential creditors or divorce. Any appreciation on the gifted assets will be free of estate and generation-skipping transfer taxes.
Why Now? Gifted assets are valued when transferred, which means that current low values will use less of your 2020 federal $11.58M lifetime exemption from estate tax and may allow you to capture estate tax-free appreciation.
Grantor Retained Annuity Trust (GRAT)
How It Works: You transfer assets into a trust while retaining an annuity stream for a term of years that you decide. When the annuity term expires, the remaining assets held in the trust pass to your beneficiaries. The IRS values the gift based on the value of the annuity stream and an assumed rate of return. If the trust returns exceed that rate, then the gift is worth more than the IRS assumes it is, and the excess passes estate tax free.
Why Now? These types of trusts work best when the Sec. 7520 interest rates are low, currently 0.4% for September 2020. Also, if you think the value of your business and investments will recover from the recent economic recession, GRAT planning may allow you to capture estate tax-free appreciation.
Charitable Lead Annuity Trust (CLAT)
How It Works: You gift assets to a trust that provides for the donation of a chosen amount to a charity over a set number of years. After the charitable payments have been made, the assets remaining in the trust will be distributed to your beneficiaries. As with a GRAT, setting up a CLAT now can transfer your appreciation to your heirs estate tax free if the trust earns more than the current rate.
Why Now? These trusts provide the most benefit when interest rates are low. Setting up a CLAT now can provide a legacy that benefits both your family and a charity of your choice.
Now more than ever, you should review your estate plan to ensure that it reflects your current wishes. Kelleher + Holland, LLC is considered an essential business – meaning we are available to help you understand the ever-changing information being rolled out daily.
Call Andrew Kelleher, Robert Holland or any of our estate planning attorneys at 847-382-9195 or email us at email@example.com. We are prepared to provide solutions customized to meet your individual needs.