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USA CALIFORNIA: An Introduction to Private Wealth Law

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Estate Planning Considerations During a Pandemic and Beyond

At Weinstock Manion, we believe in the importance of up-to-date estate plans and reviewing them during the COVID-19 pandemic. We recommend that, at a minimum, you review your basic estate planning documents to ensure that they are up to date and reflect your current wishes with respect to:

● Designation of successor Trustees in your living trust;
● Designation of Agents in your Financial Power of Attorney;
● Designation of Guardians in your Will to care for minor children; and
● Designation of Health Care Agents in your Advance Health Care Directive.

Temporarily Increased Lifetime Gift Tax Exemptions, Depressed Asset Values and Historically Low Interest Rates Have Created a Perfect Estate Planning Storm

Many plans are designed to successfully transfer assets and future appreciation on those assets to their children and grandchildren without incurring any current gift taxes.

There are three reasons why now is an ideal time to transfer assets to your children, grandchildren or future generations:

1. The Lifetime Gift Tax Exemption Is At An All-Time High. The current amount that can be gifted free of gift tax is at an all-time high of USD11,580,000 per person. However, this increased exemption is only temporary and is set to expire at the end of 2025. At that time, the exemption effectively will be cut in half. In addition, it is possible that the gift tax exemption will be reduced earlier than that. Therefore, you should seriously consider taking advantage of the increased gift tax exemption while it still exists.

2. Asset Values Have Decreased. The impact of COVID-19 on economic activity around the world has significantly impacted the values of nearly all types of assets. Reduced customer demand has affected revenues of many closely-held businesses, and as a result, the values of those businesses. Real estate values have declined as landlords lose tenants or are unable to collect rents. However, many experts believe that these decreases in value are only temporary. As a result, it makes sense to consider transferring assets to family members now, if you expect the value of these assets to return to their pre-pandemic levels over a short period of time.

3. Interest Rates Are At Or Near All-Time Lows. The effectiveness of many estate tax planning strategies is amplified when interest rates are low, and rates are currently at all-time lows. For example:

Loans to family members or certain trusts for their benefit must be made using a minimum rate of interest, called the Applicable Federal Rate (AFR), which changes monthly. The AFR depends on the term of the loan; for example, a loan made to a trust for the benefit of your child in April 2020 with a term between 3-9 years must have a minimum interest rate of 0.99%. If you loan cash to the trust, and the Trustee invests the cash in assets that earn a rate of return in excess of the interest rate you charge, the excess funds remain in the trust for your family members. This type of loan and transfer of wealth does not use up any of your lifetime gift tax exemption.

Sales of assets to certain trusts for your family members can produce similar benefits. With this type of transaction, you sell assets that are expected to appreciate to a certain type of trust called a "grantor" trust in exchange for a promissory note. For income tax purposes, a grantor trust is treated as still being owned by the grantor. As a result, since the grantor technically is selling an asset to himself, there is no gain recognized on the sale. For gift tax purposes, depending on the type of asset sold (for example, non-controlling interests in closely-held businesses), the value of the asset could be discounted significantly. The interest rate on the promissory note can be based on the current AFR. The principal payments you receive under the promissory note would be based on the depressed (and possibly deeply discounted) asset, plus interest at the low AFR. The appreciation in the value of the asset over the sale price would be removed from your estate, also without using any of your lifetime gift tax exemption.

Similarly, transferring assets to a grantor retained annuity trust (GRAT) is a technique that allows you to keep the value of the asset that you transfer to the GRAT, while transferring the appreciation on the asset to family members gift-tax free. With a GRAT, you transfer assets to the GRAT, and then the GRAT pays you an annuity over a predetermined number of years. The annuity is based on the value of the assets transferred, plus interest based on current low rates. At the end of the GRAT, you will have received the full value of the assets that you transferred to the GRAT, and your family members will receive almost all of the appreciation on the assets, without the use of any portion of your lifetime gift tax exemption. Publicly-traded stocks are a particularly attractive asset to consider transferring to a GRAT, especially if the stock market is expected to recover its recent losses over the next few years.

Bottom line: if you have been considering transferring assets to your heirs as part of a long-term plan to shift wealth to future generations and lower (or eliminate) your future estate tax obligation, there is no better time to do so than right now.

New CARES Act Provisions May Affect Your Estate Planning 

The Coronavirus Aid, Relief and Security (CARES) Act was signed into law on March 27, 2020. In addition to providing substantial direct economic stimulus to American individuals and business, the CARES Act also contains several law changes that may affect your estate and financial planning in 2020:

1. Elimination of Deduction Limitations for Certain Charitable Gifts. Generally, charitable gifts of cash to public charities can be deducted up to 60% of the donor's adjusted gross income in the year of the gift. The CARES Act eliminates this 60% limitation for 2020, and therefore such contributions can offset as much as 100% of the donor's 2020 adjusted gross income. Please note that gifts of cash to donor-advised funds are not eligible for this increased deduction.

2. Waiver of Required Minimum Distribution Rules for Individual Retirement Accounts (IRAs). Required minimum distributions that otherwise would have to be taken from IRAs in 2020 are waived.