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COVID-19 and Estate, Gift and Generation Skipping Transfer Opportunities

Our world has experienced some dramatic events in the past year.  Of course, we’re all aware of many of the terrible personal and economic consequences of COVID-19.  But the news is not all bad.  Together with certain recent law changes, the pandemic has created an environment full of tax planning opportunities for our clients, friends, and their families and businesses as we look toward 2021.  The Tax Cuts and Jobs Act (the “Act”), which became law on December 22, 2017 is a sweeping tax package which includes a number of substantial changes to the federal estate, gift and generation skipping tax laws.  Specifically, the Act and the pandemic have created three conditions that make today the perfect time for families to review their estate plans.

The first condition is historically high estate tax exclusion amounts.  The Act doubled the previous estate tax applicable exclusion amount (the “exemption”) to $11.58 million per person for 2020.  That means a married couple can transfer $23.16 million free of estate taxes.  In addition to the increased estate tax exemption, the legislation also provides an increase in the generation skipping transfer (GST) tax exemption (the amount which can pass to family members two or more generations below the transferor without being subjected to a GST tax).  The GST tax exemption amount is now equal to the estate tax exemption.  The increased GST tax exemption presents a significant opportunity for clients to preserve family wealth for future generations.  Individuals can also make gifts during life up to the exemption amount free of gift tax.  The tax benefits of the Act are not permanent because the Act is set to sunset at the end of 2025, and the current political climate may cause the expiration to occur even sooner.  Therefore, individuals with estates near or exceeding the current exemption amount should consider using their exemption to remove assets from their estate before the exemption is reduced.  The ability to transfer such large amounts of wealth free of gift and estate tax has never been higher and it may not last long.

The second condition is extraordinarily low interest rates which make several estate planning techniques significantly more powerful.  Many tax planning strategies take advantage of low-interest rates, because interest rates affect how wealth transfers are valued by the IRS.  Low Applicable Federal Rates, for example, make low-interest loans to family members an attractive planning strategy.  Intrafamily loans can be useful to children or other family members in need of financial assistance and can be used to refinance existing loans.  Selling assets to a family member or trust in exchange for a low-interest-rate installment note can also “lock in” the current asset value in an estate and shift the future appreciation to the buyer.  The seller also retains some cash flow and may benefit from future estate tax reductions depending on the type of note.  In addition to gift and estate tax planning techniques using low-interest loans, certain types of trusts, such as grantor retained annuity trusts (“GRAT”), intentionally defective grantor trusts (“IDGT”), qualified personal residence trusts (“QPRT”), and charitable lead annuity trusts (“CLAT”), are extremely powerful and attractive planning techniques which benefit from low-interest rate environments.

The third condition is that business and real estate valuations are lower now due to the Pandemic and its effects on the economy.  We have seen very large reductions in certain classes of assets and these lower asset values mean that clients will use less of their applicable exclusion when selling or gifting assets to children, grandchildren or trusts created for their benefit.  As the currently depressed valuations recover after wealth transfers, those planning techniques which take advantage of temporarily depressed values can have a staggering compounding effect that results in substantially greater wealth transfer, at potentially no tax cost.  These conditions make now the perfect time to transfer ownership of a family’s closely held business (and other assets) to the next generation.

As a result of the increased transfer tax exemptions, historically low interest rates, and depressed asset valuations, clients may want to re-examine their estate plans to be sure they take advantage of current opportunities before they disappear. 

If you would like specific advice regarding how the unprecedented opportunities resulting from the Act and COVID-19 may benefit your family, please contact our Estate Planning Department in San Jose (408.286.5800), Merced (209.385.0700), and Modesto (209.576.0111) or contact Beau Correia, Estate Planning Attorney, at