It is hard to imagine anything good coming from the COVID-19 crisis, or the mass unemployment and economic damage that has resulted from efforts to stop the coronavirus from spreading. Current market conditions, however, have created rare opportunities to lower taxable estate values and maximize wealth transfers to family members and trusts.
First and foremost, we extend our sincerest compassion to anyone who has been adversely affected by the crisis. It is important to understand, however, that the forced economic shutdown and the ensuing bear market has temporarily suppressed asset values. Further, from an estate planning perspective, this presents an opportunity to mitigate taxes.
Asset values are basically frozen for gift and estate tax purposes at the time they are transferred to family members, trusts, and other beneficiaries. Thus, transferring estate assets when they are undervalued means less taxes will result than would otherwise occur in better economic times. The overall taxable value of your estate could also be reduced, and your selected asset recipients will further benefit as the assets you give them will potentially appreciate when the economy rebounds.
In addition, interest rates for loans between family members are at an all-time low. Every month, the Internal Revenue Service publishes applicable federal rates (AFR) based on various economic factors, including the prior 30-day average market yields of U.S. treasury obligations. For April 2020, short-term AFR is 0.91%. In April 2019, it was 2.52%. Taking advantage of these historically low rates can equate to significant tax savings, and the low interest rate environment makes other estate planning techniques even more effective.
Depressed asset values also allow for more “bang-for-the-buck” in regard to the federal gift tax exclusion. The exclusion affords $15,000 in personal giveaways every year without counting against a lifetime gift exclusion of $11.58 million. That total may seem out of reach, but it is scheduled to be cut in half in 2026 and a change in presidential administrations would almost certainly lead to a lower and more rapid drawdown.
While taking advantage of current market conditions may be wise, it is also complicated. Estates vary in terms of size, components and circumstances, and consulting with a qualified estate planning attorney is the safest way to pursue your estate planning goals. The best part may be that you do not have to risk leaving your home during the COVID-19 pandemic to do it. Contact our law practice to schedule a meeting today to discuss your estate planning with us.