Wealth Transfer Planning During the COVID-19 Crisis


by Michael R. Crowder, Esq. and Marshall H. Peterson, Esq.

The COVID-19 pandemic has caused massive disruption in our relationships and lifestyles. Millions are out of work and a number of businesses will not weather the storm. Going to the office, hanging out with friends, celebrating with family—all curtailed as public health professionals and public officials battle the scourge. The equity markets are also roiled by the dislocations and uncertainties resulting from the COVID-19 crisis. Values in stock portfolios are subject to wild fluctuation, interest rates are at historical lows, and all this as a backdrop to what will certainly become political discord on tax policy. Although many feel helpless, or wonder what can be done, these unfortunate events do create opportunities for wealth transfer planning.

Keep in mind that the federal transfer tax exemption is currently $11.58 million, $23.16 million for married couples. This level of exemption, though, is temporary. If Congress does not step in, it is scheduled to “sunset” on January 1, 2026, at which time the exemption will revert to $5 million for an individual (indexed). A future Congress could also accelerate the reversion to $5 million, or further decrease the exemption amount.

For those who are concerned that greater wealth transfer taxes will reduce the amounts for future generations, some longstanding planning techniques seem compelling. Here are just a few strategies we are currently recommending to our clients:

1) Establishing Irrevocable Trusts

An irrevocable trust may be used to remove assets from what would be a taxable estate. By funding an irrevocable trust now—say, for your spouse’s or children’s benefit—you may be able to “lock in” current estate tax exemption levels. The IRS’s stated position is that exemption gifts, including generation-skipping transfers (“GST”), will not be recomputed if the exemption levels decrease, so long as the transfer was made before exemptions decrease.

2) Grantor Retained Annuity Trust (GRAT)

GRATs provide the opportunity for a substantial tax-free, low-risk transfer of wealth. A GRAT is a certain type of irrevocable trust under which the individual transferring the assets (“Grantor”) retains a payout from the trust (the “annuity”) that is equal to the value of the transfer with a mandated appreciation rate specified by the IRS. At the termination of the GRAT, the value in the trust over and above the required annuity transfers tax free to the remainder beneficiaries named by the Grantor when the trust is established. Most GRATS are short term—two years is typical. 

GRATs have been in wide use as effective wealth transfer tools since 1989 when they were made part of the Internal Revenue Code. Two factors seem to make them especially attractive now:

  1. the interest rate specified by the IRS is at a historical low (0.6% in June 2020), and

  2. the market volatility of stocks means that there is a good chance that assets will be transferred to the GRAT at a low valuation compared to recent times.

The success of a GRAT is measured by the increase in its total value over its term, meaning the appreciation of the underlying asset in addition to dividends. With such a low hurdle rate, we recommend considering, along with your financial advisor, the stock holdings most appropriate to use in funding a GRAT. Almost all appreciation will be passed on free of transfer tax.

3) Low Interest Loans

The historically low interest rates can also be used on loans to benefit family members and transfer wealth. Under IRS rules, loans must bear interest, but the current required interest rate is lower than even the extremely low interest rate for a GRAT. An asset can be sold to the next generation at the current value; (though, assets such as family business interests which asset may be devalued by the current economic uncertainty); free of transfer tax—a bona fide sale is not subject to transfer tax, and at almost interest-free rates.

As with any planning concept, whether it is appropriate for you depends on an analysis of all facets of your planning. We are ready to discuss these, and other aspects of your planning.

Other COVID-19 Coverage:
  1. Paycheck Protection Program Flexibility Act of 2020

  2. The Good Faith Necessity Certification Requirement under the CARES Act and Paycheck Protection Program: A Borrower's Update

  3. How To Get Your Paycheck Protection Program Loan Forgiven: An FAQ Guide for Small Businesses and Self-Employed Individuals

  4. Are COVID-19 Business Losses Covered By Insurance?

  5. CARES Act: Small Business Loans

  6. We've Got Your Six (Reasons for Paid Sick Leave Under the FFCRA) Covered.

  7. CARES Act Provides Early Access to Retirement Funds and Other Retirement Plan Relief

  8. DOL Provides Limited Guidance on New Families First Coronavirus Response Act

  9. A Summary of the Family First Coronavirus Response Act for Employers and Employees

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