Excerpts and content provided by Sol S. Reifer, JD, LL.M-Estate Planning, Accredited Estate Planner
The rapidly evolving coronavirus (COVID-19) crisis is creating several unique estate planning and legal challenges around the world, particularly given the volatility of the financial markets. It also creates some innovative opportunities in wealth planning.
You may wish to consider the following strategies to ensure that during these challenging times, your estate planning is up to speed.
Coronavirus has jolted people awake all over the world. As our secondary worries take a back seat, our primary concerns now are an increased focus on our own and our family’s financial well-being.
In the context of the Covid-19 crisis, to stay financially secure, our advice is for you to recheck your estate planning documents to make sure that they are updated and in line with current government policies.
These include, but are not limited to, legal documents such as wills, healthcare directives, powers of attorney which determine who holds the authority to make decisions on your behalf if you are unable to, and those detailing information about your chosen beneficiaries.
All these legal decisions must be made per your wishes, which makes it crucial for all relevant discussions to be held sooner rather than later.
Please note that if your estate plan has not been updated according to the 2012 American Taxpayer Relief Act or the 2016 Tax Cuts and Jobs Act, it is essentially a non-functioning plan due to outdated clauses.
Moreover, if you have substantial retirement savings, make sure the trusts which become beneficiaries of your IRAs are complying with the 2020 SECURE Act.
Given the unstable nature of financial markets at this time, it can be observed that the value of assets has decreased. At the same time, interest rates are at an all-time low. These factors suggest this may be the right time for you to pass on your assets to your chosen beneficiaries. For this purpose, you can employ the following strategies:
Intra Family Transactions
In today’s scenario, where interest rates have fallen, it is a good idea for senior members of your family to sell or loan their assets to younger members.
Once the economy bounces back, the value of the asset that has been sold or loaned may also increase, often with any additional value above the interest rate charged at the time of the sale being transfer tax free. This means that the recipient of the asset will not have to pay the tax fee typically charged when a property is transferred from one person to another.
What this suggests is that you can use the current situation to your advantage. If you own property and wish for your children to have it after you, right now is the time to set your plan in motion. This is because you can structure the process of property transfer while minimizing the taxes that may have to be handled by your beneficiaries.
Grantor Retained Annuity Trusts
Through the use of a Grantor Retained Annuity Trust (GRAT), you can contribute your assets to a trust in return for a fixed amount of money every year until the plan dissolves. The rate of return on this investment is calculated and prescribed by The IRS (commonly known as the 7520 rate).
At the time of writing this article, this rate is 1.8%. As such, if you choose to take returns on investments matching the value of the assets contributed, along with a 1.8% rate of return, any assets left with the Trust at the end of your GRAT agreement will pass on to your chosen beneficiary without them burdened with transfer tax. Furthermore, if the assets contributed an increase in value beyond the 1.8% return rate, the additional amount your beneficiaries acquire is tax exempted.
Charitable Lead Annuity Trusts
A Charitable Lead Annuity Trust (CLAT) is similar to a GRAT. However, the difference is that through a GRAT, you receive a return for your asset contribution, where a CLAT directs this return on investment to a charitable organization. At the end of your term with a CLAT, your assets that remain in the Trust will be transferred to your chosen beneficiary.
It is also possible to set up a CLAT term where the remaining assets passed on to your beneficiaries are exempted from the transfer tax.
Before making a decision on adjusting your estate plan, it is essential to talk to an estate planning professional. If you need a recommendation for an attorney or have questions about your estate plan, please contact your MMFA advisor.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.