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Publications | July 13, 2020
4 minute read

10 Estate and Tax Planning Ideas for a Depressed Market

Depressed market values, low interest rates and historically high federal estate, gift and generation-skipping transfer tax exemptions have created some excellent opportunities to make impactful gifts to your family and generate potentially significant tax savings. 

1. Create GRATs and CLATs

Grantor-Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs) shift appreciation in excess of the IRS “Section 7520” rate to the next generation.

    2.  Take advantage of the historically-high federal exemptions

    Federal estate, gift and generation-skipping transfer tax exemptions are higher than they have ever been ($11.58 million for individuals, $23.16 million for married couples), but exemptions could decline significantly as early as next year depending on the outcome of this year’s election. Now is the perfect time to make large gifts to use your remaining federal exemption amounts.

    3.  Give away assets that have depressed values

    While asset values are low, consider using your federal transfer tax exemptions to give assets with temporarily depressed values to your children or grandchildren, or contribute these assets to trusts for their benefit.

      4.  Create a SLAT

      The gift to a Spousal Lifetime Access Trust (SLAT) removes assets from your estate, and the gift can be sheltered from gift tax by utilizing the high federal exemption, yet the assets can be available to your spouse in the future. The SLAT may be funded with direct gifts or by combining gifts and a sale of assets, taking advantage of the depressed asset values at the time of funding. In the right circumstances, and if the trust terms differ, it is possible for both spouses to create SLATs.

      5.  Make gifts to grantor trusts 

      If you give assets to a grantor trust, you will pay the income taxes on the trust’s income rather than using trust assets to pay the taxes. Thus, the trust grows tax free, and your payment of the taxes due on trust income is essentially a gift to the trust—one that doesn’t use any of your gift tax exemption.

      6.  Sell property to a grantor trust

      Selling property (that is expected to appreciate) to a grantor trust using an installment loan takes advantage of low values and low interest rates and creates an opportunity to shift significant appreciation to children and grandchildren free of estate, gift and generation-skipping transfer taxes.

      7.  Review your current GRATS or previous sales to grantor trusts

      With the current depressed value of the GRAT’s assets, consider substituting cash, other assets, or even a promissory note for those assets, allowing you to use the assets withdrawn from the old GRAT to create a new GRAT that will benefit from a low initial value and low interest rates. The sale to a grantor trust might also be “unwound,” permitting you to start over with today’s low values.

      8.  Make or refinance intra-family loans

      So as not to trigger gift taxes, intra-family loans must bear interest at a rate at least equal to the Applicable Federal Rate (AFR), but these rates are much lower than those offered by financial institutions. Intra-family loans keep the interest payments in the family and avoid loan costs charged by financial institutions, and the currently low AFR also will allow borrowers who invest the funds to capture more appreciation.

      9.  Convert a traditional IRA to a Roth IRA

      Because taxes are paid on Roth IRA assets going into the account, income tax is not owed by you or your heirs on distributions from the account, and the assets can grow tax free. Conversion from a traditional IRA to a Roth IRA may make sense in this market because

        A Roth conversion has many moving parts, so you should carefully consider whether it is appropriate for you. This also may be an excellent strategy when combined with increased charitable gifts (see “New Charitable Contribution Opportunities under the CARES Act”).

        10.  Harvest tax losses

        Take advantage of depressed values of marketable securities by selling them at a loss to offset capital gains on other portfolio assets. (Tax-loss harvesting also can apply to the assets in your grantor trust.)

        For more information on planning strategies in the current market, please contact your Warner relationship attorney.