If you are planning to convey your wealth to the next generation, now is an ideal time to take advantage of a remarkable combination of tax-saving opportunities. But don’t delay because this window of opportunity may not last much longer.
A combination of low interest rates, regulatory changes and market conditions have opened the door to several intriguing estate planning strategies. Talk with your tax and financial advisors to see if these approaches could reduce the potential tax burdens for you and your heirs.
• Give a gift. With the pause of the bull market, many investors have lower valuations of stocks or other assets in their portfolios. Whilst that doesn’t look good on your balance sheet, gifting those assets to your children or grandchildren reduces your estate, while transferring taxable gains on stocks you transfer to your heirs. In addition, any future appreciation on those assets would not inflate the size of your estate.
• Purchase life insurance. Currently, a window has opened where you can purchase life insurance without having a medical checkup. Therefore, you could purchase a significant policy with your heirs as beneficiaries.
• Provide a loan. With today’s low interest rates, you could make a low-cost inter-family loan to family members. They could use the proceeds to refinance existing debt or invest in their own portfolios. Any increase in the value of those assets would be the responsibility of your heirs and wouldn’t affect the value of your estate.
• Sell your assets to a trust. You can structure a “grantor” trust to hold a portion of your assets and convey them to your heirs. Anything placed to the trust will be subtracted from your gross estate, reducing potential tax liability.
• Create an Intentionally Defective Grantor Trust (IDGT). With this strategy, you would sell assets held in a trust to your heirs and receive a promissory note in return. That immediately removes the asset from your estate, although you would still have to pay income tax on the very modest interest from the note.
• Consider a Grantor Retained Annuity Trust (GRAT). If you like the idea of receiving an income stream from your investments, consider this approach. You would receive an annuity payment for a certain number of years, and any appreciation of the underlying assets above the value of the annuity would go to your heirs without any gift tax.
• Leave a legacy with a Charitable Lead Annuity Trust (CLAT). You can transfer assets to this trust, which will provide an annual annuity payment to a designated charity or private foundation. At the end of that period, the remaining assets can be distributed to your children or grandchildren.
Why act now? We expect the U.S. economy to stabilize, interest rates will go up and the stock market return to an upward trajectory, once again increasing your taxable estate.
Remember that the current federal estate and gift tax exemptions are scheduled to revert to $5.6 million in 2026, from the current $11.58 million. But the federal government may need to raise tax revenue to pay for economic recovery and stimulus programs, and it’s possible that Washington could increase those rates – along with the generation-skipping transfer (GST) tax – before then.
If it’s been several years since you have reviewed your estate planning documents, make it a priority to re-examine your wealth transfer strategies. You may also want to bring in an outside professional who can review the performance of your advisory team and identify potential opportunities in today’s turbulent world.