Current Economic Climate Presents Estate Planning Opportunities

Adam J. Centner

At KMK Law, our top priority is the health and wellbeing of our employees, clients, and community. Our attorneys and staff are working around the clock to guide clients through the legal and business ramifications of the coronavirus pandemic.

Although navigating the day-to-day needs of our clients is our primary focus, KMK’s Private Client Services Group is also actively working with clients who want to leverage historically low interest rates and lower markets. The ongoing pandemic reminds us that everyone should have basic estate planning documents in place, but more sophisticated planning may also be warranted in some cases. The current economic climate, although uncertain and daunting for all, provides unique estate planning opportunities for certain individuals and families, particularly business owners and high net worth individuals. 

Some of the long-term planning strategies that we are currently discussing with our clients include the following:

GRAT and CLAT Planning. A grantor retained annuity trust (“GRAT”) is an estate planning vehicle in which an individual makes a one-time contribution of high-yield assets (g., certain marketable securities) to an irrevocable trust and, in turn, retains a right to receive a fixed annuity payment for a specified term, say two years. In a “zeroed-out” GRAT, the individual’s contribution for gift tax purposes is valued near $0, as the assets plus expected growth (which expected growth is calculated at the IRS-published rate in the month of the contribution) are almost entirely returned to the individual through the annuity payments. At the end of the trust term, any remaining assets in excess of the expected growth are transferred tax-free to the trust’s beneficiaries, generally the individual’s descendants.  

The amount of the annuity payment is calculated using the current “section 7520 rate” determined by the IRS each month. The section 7520 rate for April 2020 is 1.2% (compare this to April 2019 when the section 7520 rate was 3.0%). The low rate, coupled with what some believe to be artificially-low markets that will likely show significant recovery within the next two years, make this month a particularly good time to consider a GRAT. 

Charitably-inclined individuals should also consider a charitable lead annuity trust, where a qualifying charity will receive the annuity payments and any growth beyond the section 7520 rate will pass to designated individuals transfer tax-free.

Intra-Family Loans. When one family member loans funds to another family member, the lender often desires to use the lowest interest rate possible while avoiding imputed interest. This rate, referred to as the Applicable Federal Rate (the “AFR”), is set by the IRS each month. The short-term AFR for April 2020 is 0.91%, the mid-term AFR is 0.99%, and the long-term AFR is 1.44% (compare this to 2.52%, 2.55%, and 2.89%, respectively, in April 2019), making now an ideal time to make or refinance intra-family loans.

Family Gifting. For individuals considering gifting assets to family members or others, the current dip in value of marketable securities and certain real estate and closely held businesses allows donors to gift more of the underlying asset at a lower valuation. Any future appreciation of the asset grows outside of the donor’s estate free of any transfer tax, and income is no longer taxable to the donor. 

Defective Grantor Trusts. In lieu of making a loan or gift directly to an individual, however, a donor should also consider making the loan or gift to a defective grantor trust. A defective grantor trust allows the assets to be held in trust for the beneficiaries outside of the grantor’s estate while also allowing the grantor to pay the income tax, thereby permitting the trust assets to effectively grow tax-free while reducing the donor’s gross estate. 

To discuss any of these strategies, or to be sure that your estate plan and business succession plans are in order, please contact Adam Centner at 513.579.6488 or acentner@kmklaw.com.