Estate Planning Opportunities in a Volatile, Low Interest Rate Environment

Written by Jeffrey Eisen, Autumn Ronda and Joyce Feuille 

The recent dramatic decline in the value of the stock market, and overall economic volatility, has left us all worried about our financial health, not to mention the COVID-19 virus creating fears regarding our general health.  In these uncertain times, there are steps to take for those who are in a position to transfer wealth to future generations now, as well as steps to take even if you do not wish to transfer wealth currently.

First, for everyone, if you are spending more time at home than ever, use some of it to review your basic estate plan to make sure it is up to date, and reflects your current desires.

Second, if you have been procrastinating in making lifetime gifts to your heirs while we have a temporarily generous estate, gift and generation-skipping transfer tax exemption now may be the time to pull the trigger.

These exemptions (currently about $11.5 million per person, or about $23 million per couple), combined with the current low interest rates and depressed asset values caused by the volatility in the market, present a unique situation, one that you may not see again in your lifetime. You currently have an opportunity to transfer wealth at a substantial discount, as compared to even a month ago.

The temporarily increased exemptions are indexed for inflation, but are scheduled to sunset and be reduced by about half at the end of 2025, and could be reduced even sooner depending on the outcome of the November elections. Therefore, this year may be the only opportunity to act.

The value of a gift is measured by its fair market value on the date of the gift.  Therefore, if the gift occurs when asset values are depressed, and later recover, then all of that appreciation is removed from the taxable estate of the donor, thus passing to the beneficiary free of both gift tax and estate tax.  This makes the present time an outstanding opportunity to gift assets to your heirs.

In addition to the opportunity afforded by making outright gifts, the already historically low interest rates have been further slashed in the Federal Reserve’s recent attempts to revive the economy.  Many advanced wealth transfer strategies are most successful in a low interest rate environment; that is, the success of the planning depends upon the gifted asset’s ability to appreciate at a rate greater than an IRS-prescribed interest rate which changes each month and which is extremely low (1.2% for gifts in April 2020).  There are many sophisticated planning techniques that we can tailor to a particular client’s situation, many of which also benefit charity or allow the client to retain an interest in the gifted asset.

For clients who would prefer to sell assets to their descendants, there are additional techniques to employ at even lower interest rates.  Similarly, clients may prefer just to loan money to their descendants to allow them to invest on their own.   Either way, the required interest rates on loans/installments sales made in April 2020 are under 1% for loans with terms of 9 years or less, and only 1.44% for loans with terms greater than 9 years.

Given that the world is understandably engrossed in the current economic and public health crisis, it may be challenging for individuals to review their estate plans and consider advanced gifting strategies, but for those that are able to do so, it may provide them with a particularly unique opportunity to preserve and transfer additional wealth to their heirs.

If you would like to discuss whether any of the tax planning strategies mentioned herein are appropriate for you, or to review your estate plan generally, please contact a member of our Tax/Trusts and Estates Department.