Financial Downturn Creates Estate Planning Opportunities


The COVID-19 pandemic has triggered a significant decline in the value of stocks and caused uncertainty with regard to the value of other assets. While the resulting decline in values is worrisome, it nonetheless provides a unique opportunity for taxpayers to transfer wealth to future generations in a very tax efficient manner. This opportunity is bolstered by the current low interest rate environment. For those looking to take advantage of the current situation, the following are some techniques to consider.

Grantor Retained Annuity Trust (GRAT) 

A GRAT is a trust established by a taxpayer to which the taxpayer transfers assets while retaining the right to receive a set annuity for a certain number of years (e.g., 2 years). At the end of the term, any assets remaining in the GRAT are then held for the benefit of the taxpayer's family members free of gift and estate taxes. When a GRAT is established, there typically is little or no reportable gift, due to the way in which the value of the gift is computed for Federal gift tax purposes. If the value of the assets in the GRAT appreciates during the term at a rate of return in excess of a rate set by the IRS (currently 1.2%), the excess appreciation passes for the benefit of the taxpayer's family free of gift and estate taxes. Note, the taxpayer must survive the term of the GRAT in order to realize the tax savings. Ideal assets to transfer to a GRAT are under-valued assets that are expected to appreciate significantly during the term of the GRAT, such as stocks that have recently declined in value. 

Loans to Family Members  

In today's low interest rate environment, intra-family loans are a simple and often-times overlooked method to transfer wealth to family members. Except for the minimum interest rate that must be charged, there is great flexibility under tax laws with regard to setting the terms of payment, including the manner in which principal will be repaid. For example, such a loan could provide for the payment of only interest during the term of the loan, with all principal payable at the end of the term. Interest should be paid at least annually and would be included in the taxpayer's taxable income. The minimum interest rates set by the IRS for loans made in April 2020 are as follows:



3 years or less


4 – 9 years


10 years or greater


Gift of Low Value Assets to a Grantor Trust 

Gifting assets expected to appreciate significantly in the future to an irrevocable trust for the benefit of family members is a common approach for transferring assets in a tax efficient matter. Any appreciation in the value of the assets after the gift is made, in general, is no longer subject to gift, estate or generation-skipping transfer (GST) taxes. Presently, each taxpayer has an $11.58 million federal gift tax exemption ($23.16 million for married taxpayers), which sets the cap on the amount that may be gifted without incurring a 40% gift tax. For income tax purposes, often times such trusts are structured as "grantor trusts." A grantor trust is a trust whose assets are deemed owned by the trust for gift, estate and GST tax purposes, but are deemed owned by the taxpayer who established the trust for federal and state income tax purposes. As such, the taxpayer continues to pay the income tax on the taxable income realized with respect to the trust assets. Under the Internal Revenue Code (Code), the taxpayer's payment of income tax on behalf of the trust is not deemed a gift to the trust notwithstanding the economic benefit to the trust, thereby providing an additional transfer of wealth from the taxpayer to the trust free of gift, estate and GST taxes, and allowing the trust assets to grow tax free.  

Sale of Assets to Grantor Trust 

The unique tax nature of a grantor trust affords another potential wealth transfer opportunity in the current environment, one that would not consume any portion of a taxpayer's federal gift or GST tax exemptions. Under the Code, transactions between the taxpayer and a grantor trust are ignored for income tax purposes. As a result, a taxpayer could sell assets for fair market value to an existing grantor trust, or to a new grantor trust established by the taxpayer, and that sale is not a reportable event for income tax purposes (and thus does not trigger a capital gain). In exchange for the assets sold to the trust, the taxpayer could receive a promissory note payable by the trust. The rate of interest payable under such a note would be subject to the minimums set by the IRS, as noted in the table above. However, if the taxpayer dies prior to the note being paid in full, there is a potential for capital gain recognition. Any appreciation in the value of the assets after the sale is made is no longer subject to gift, estate or GST taxes. Ideal assets for a sale to a grantor trust are those that have recently declined in value but which are expected to recover. 

The Wealth and Succession Planning attorneys at Burke, Warren, MacKay & Serritella, P.C. are available to discuss these techniques, or your estate plans in general. 

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