5 Wealth Transfer Options for Large Estates to Mitigate Taxes

May 6, 2020
Brad Galbraith, Esq.

Did you know the economic downturn caused by the COVID-19 public health crisis has created opportunities for large estates to mitigate taxes? While no one would consider a down-market a good thing, current conditions allow for estate wealth transfers with reduced costs. Let us share five options for you to consider right now in our blog.

1. Freeze Asset Values. Asset values are basically frozen for gift and estate tax purposes at the time they are transferred to family members or trusts that benefit family members. Thus, transferring estate assets when they are undervalued means less associated taxes will result than would otherwise occur in better economic times.

2. IDGTs. When you put income-producing assets into an Intentionally Defective Grantor Trust, or an IDGT, you, the grantor, pay the income taxes. This has the effect of allowing trust assets to grow tax-free and reduce your estate by the amount of the income tax payments. The IRS does not consider this form of wealth transfer a taxable gift, meaning you avoid gift taxes and your beneficiaries keep more of their inheritance, especially as the IDGT assets appreciate in value.

3. GRATs. As we shared in a recent blog post, a Grantor Retained Annuity Trust, or GRAT, is an irrevocable trust that allows for the person establishing the trust, known as the grantor, to pass a significant amount of wealth to family members with little or no gift tax cost. The grantor transfers estate assets to the GRAT which in turn pays the grantor an annuity for a limited period of time. The GRAT annuity payments derive from an IRS interest rate called the 7520 rate. If the assets are initially undervalued (perhaps due to the COVID-19 bear market), then appreciate over the life of the GRAT, the gains would go to the beneficiaries of the trust tax-free. 

4. All-Time Low AFR. Every month the IRS publishes interest rates for private loans called applicable federal rates, or AFRs. Currently, AFRs are at all-time lows. If an estate-holder made a loan to a family member and the family member invested the loan, they could keep any future gains made from the investment tax free. With all-time low interest AFRs, this wealth transfer technique could become cheaper than any institutional loan.

5. Maximize Annual Gift Tax Exclusion. The federal gift tax exclusion allows you to make $15,000 in personal giveaways every year without penalty. When asset values are depressed, you can get more bang-for-the-buck by maximizing the annual exclusion. 

These wealth transfer options may present opportunities for tax savings, but they are also complicated and depend on a number of factors relevant to individual estates. We encourage you to contact our office to schedule a meeting to discuss your ideas for your estate plan. Together, we can formulate a plan to maximize your goals for your legacy.

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