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COVID driving changes in estate planning law

By: Eric Gurgold, Esq.

The last quarter of the year is a traditional time for reviewing your estate plan and completing gifts. 2020 presents many unique opportunities to supercharge gifts because of the economics of the COVID-19 pandemic. Historically low interest rates and depressed asset values present the opportunity for maximum leveraging of the federal gift tax exemption.

The IRS sets interest rates known as the 7520 rate. The rates are applied to calculate gifts that take place over time, such as a gift of a remainder interest, gifts using grantor retained annuity trusts and other common estate planning techniques. It also sets the minimum interest rate required in intrafamily loans, commonly called the Applicable Federal Rate or AFR. If a loan does not carry an interest rate, the IRS will impute the current AFR into the loan and tax the lender on the imputed interest.

Intrafamily loans

Low interest rate loans should not be overlooked in the current economic climate. This is an ideal time to make intrafamily loans to a child or grandchild, finance a sale of assets to a grantor trust, sell assets in exchange for a promissory note and other such loans. Not only is the interest rate low, but the borrower could invest the proceeds in fixed income or other investments that yield a much higher rate than the AFR being charged.

A very basic example of the impact of utilizing the low interest rates is:

  • A parent makes a $1,000,000 loan to a child with payments of interest only and a balloon payment at the end of a 9-year period using the current AFR, which is 0.38%.
  • The interest over the 9-year period is $34,200.
  • If the child invests the loan proceeds in an investment returning 3.0% a year, the child will realize $270,000 over the 9-year period at a cost of $34,200.
  • Contrast this to a loan made two years ago using the AFR then in effect, which was 2.8%, where the loan would cost the child $252,000 dollars in interest.

Sharon Treiser, Vice President at J.P. Morgan Private Bank in Naples, says “the depressed market values caused by the COVID-19 pandemic gives rise to gifting opportunities of assets with low values, which are expected to regain their full value in a short period of time.”

Making gifts of low value assets where the appreciation is expected to be significant removes the appreciation on the assets from the donor’s estate and from future estate tax at the donor’s death. In the above example, had the loan not taken place, the $270,000 of growth would have accrued to the parent and would be included in the parent’s estate at death.

Coupling low value assets together with using the historically low interest rates result in estate planning opportunities rarely seen in this century. Estate planners have the full arsenal of tools to use in these unique times, including everything from simple intrafamily loans to GRATS, sales to intentionally defective grantor trusts, conversions of traditional IRA’s to Roth IRAs, and private annuities. 2020 indeed presents unique opportunities to supercharge your estate plan by making gifts of low value assets at historically low interest rates before year end.

If you should need assistance with your estate plan, Eric Gurgold may be reached at 239-344-1162 or by email at eric.gurgold@henlaw.com.