A Guide to Wealth Transfer Opportunities in the COVID-19 Era

by Tim Domino, CPA, CFP® May 26, 2020 Estate & Generational Wealth Planning, Financial Planning, COVID-19: Market Watch

With ongoing tragedy and future uncertainty surrounding the COVID-19 pandemic, it’s not the time to celebrate silver linings. However, that doesn’t mean we should ignore opportunities when they present themselves.

If you’re at or near the stage of estate planning, now may be the ideal time to explore certain strategies. To help high-net-worth families protect and efficiently pass wealth on to future generations, Sanderson Wealth Management has created a new complimentary resource, Wealth Transfer Opportunities in the COVID-19 Era.

The two-part guide covers:

  • Wealth transfer planning strategies centered around assets that have dropped in value due to the current economic conditions
  • Strategies designed to leverage historically low interest rates to reduce the transfer-tax cost on gifts


Justin Sanderson: Welcome to the first video in our Market Watch series today with a focus on the COVID-19 epidemic that we're all living through today. Got Tim Domino here today that's going to chat with us a little bit about how all of this stuff going around today may present some opportunities for people in light of the current environment. What we've seen so far is unprecedented central bank intervention, quickly reacting fiscal stimulus, racking up $4 trillion in, well, some future debts that we'll pay at some point. What else have we seen? We've seen depreciated asset prices, small businesses, large businesses, all types of businesses, unless you're in a cloud based sort of business, probably. We've also seen interest rates fall to near zero. I know I just refinanced today, it was officially locked the rate.

I think a lot of our clients probably have too that still have debts outstanding. At any rate, all of those different things certainly change the landscape from where we were the last time you and I sat down here all of 12 weeks ago.

Tim Domino: Absolutely. Yeah.

Justin S: With that, how are you thinking about planning and what's changed in these past 12 weeks?

Tim D: Well, the coronavirus pandemic has definitely thrown our lives up into a tizzy, if you will. It's changed just about everything we know, the way we interact in our daily lives. But, with any kind of disruption like that comes great opportunities and the wealth transfer space is no exception. The things you talked about before, these depressed asset prices, both for public companies as well as private companies, even though the private companies aren't valued on a daily basis, they're down to, and these historically low interest rates have definitely presented some of the perfect ingredients for some wealth transfer strategies that are very powerful and impactful for our clients.

Justin S: Let's talk about depressed asset prices because we're all looking at our statements, we're all thinking about the value of our businesses and it's disappointing. We don't like thinking about, and we certainly don't get excited about, handing out money during this period of time necessarily. What kind of value are you seeing from there? What strategies should people be thinking about?

Tim D: Let's take a step back and think about why it's important to start planning around assets that have decreased values. Number one, it's just the basic assumption that if it's worth less today, the transfer tax or cost of moving those assets to generation to generation is much lower today than you would do it even four months ago. What we want is that appreciation to occur, not in the taxpayer's estate, but in the generation after them or two generations down.

Tim D: That's a very simple, but an overlooked piece of the puzzle here. We have depressed assets that are certainly depressed because of the current economic conditions, but also there's a lot of emotional and irrational behavior in the market right now that might be driving those prices down. If we think that economics are going to return to normal, to some degree let's hope, and also, maybe there's new opportunities presenting themselves for these businesses, we should see appreciation in the future. Again, that should be outside of the estate. That's the first thing.

Tim D: You mentioned the tremendous debt that we're incurring in this coronavirus response, not only in the United States, but around the world. What that likely means is increased tax rates in the future. Not only income taxes, but transfer taxes like a state taxes, gift taxes, or generation skipping transfer taxes are certainly some of the political favorites because they don't impact that many people. It's a softball that Congress gets in order to raise revenue and do things like that in the future.

Justin S: I think that corporations are low hanging fruit having jumped to the lowest tax haven in the developed world, down to 21%. Wealthy families are probably pretty far up there because the size of a taxable estate now is what, 25% plus?

Tim D: Yeah, the last piece of that puzzle is that basic exclusion amount, which currently for 2020, sits at $11,580,000 per person. You're looking at $23,000,000+ for families of wealth before they incur an estate tax. That's a lot of money, and really, the richest that's been, or most generous it's been in history with the exception of a few periods when it was gone altogether.

Justin S: One of the things we should be thinking about there, probably, is that not only is the rate unfortunately likely to go up, but that threshold is probably going to come down.

Tim D: Absolutely. It's scheduled to come down in 2026 when this current tax cuts and Jobs Act environment expires. We know it's going to come down likely at that date, that sunset date, but could certainly come down sooner through an act of Congress. Certainly, if we don't have a tax easing administration in there, it'll be certainly on the chopping block. A lot of headwinds being faced in that direction. Those are all things that say, "Transfer assets today," because the asset cost is depressed and likely if there is a transfer tax cost or use of some of that lifetime exemption, it's at a lower rate than it will be in the future.

Justin S: We're looking at 20% plus depreciated asset values versus where we were in February. You're getting a 20% tax savings right off the bat, plus the higher likely higher rates and lower threshold. This is at least worth 20% by acting now, when it probably feels uncomfortable to be giving anything away, but you still want to be able to do that.

Tim D: Right. Absolutely. I think the big things you should be looking at right now, there's the top strategies you would consider are simple gifting. Your simple gifting strategy of making use of your $15,000 a year per person, annual exclusion amount is important. On top of that gifting depreciate assets to the next generation in order to have that stuff appreciate outside of your estate is important. You could also give through a trust if you're uncomfortable giving those things outright to younger children or grandchildren, and the trust just helps you keep some strings on those assets a little bit longer. We wrote a nice piece on trusts a while back, so if you're interested in that you can-

Justin S: Link down below in the description.

Tim D: That's right. If you're interested in that, you can take a read through. That's the really simplest way to approach this. Outside of that, there's some unique strategies that you may be able to deploy if you have existing trusts. Some of these trusts have SWAT powers, what they're called, and that allows a trustee to go in and exchange assets that are in that trust for assets outside of the trust. You have these assets that are inside the trust that are depressed in value, but still probably have some good appreciation on top of them, depending on when you transferred them in, or have some good appreciation potential in the future. If you can get high basis assets, personally, out of your estate, into that trust in exchange for those low basis assets, you can bring those low basis assets then into your personal estate.

Tim D: If you die with them, they receive a step up in basis. It's really income tax efficient planning for your heirs if you think that death is imminent. It's not planning for everybody, but it's a powerful thing. If you're looking at the costs for getting those assets outside of the trust or out of the trust right now is much cheaper than it would have been four or five months ago. It's just a strategy to consider deploying if your facts and circumstances fit. The other one, kind of similar, is a Roth conversion strategy. If you have Roths right now, and again, you're towards the end of your timeline of life, you could consider doing a Roth conversion, paying the taxes on all those IRA assets and leaving your heirs with a tax free asset.

Justin S: You mentioned that before in our Secure Act piece, or in video, last time. Nice that it's gotten even more powerful now with the decreased asset prices.

Tim D: Exactly. The reason is, it's just cheaper to do it now. You've got a 20% discount on what it would have cost you five or six months ago. I got a lot of the strategies just centered around things being cheaper than they ought to be, or ordinarily are at the moment.

Justin S: Very good. All right. That covers depreciated asset prices, which hopefully relatively soon after this video is published, we'll be appreciating after everybody does these strategies. At the same time, I mentioned that I've taken advantage of the low interest rate environment. I hope most of you have also, but there's some advanced planning techniques, which we can deploy now that we have lower interest rates, even lower than before. I don't even know what the 10 year is now. It's under one, I know that.

Tim D: Yeah, exactly. I don't want to lose too many people by going through the specifics of these strategies because they are fairly complicated in their application. If we step back and just visualize them in general, I think you'll get the point of it. There are certain strategies that hinge on IRS rates that are published, whether it's the 75-20 rate or the applicable federal rate that's out there that are really set hurdles for asset transfers in the trust that they need to exceed in order to be effective strategies. If you can see some of these rates down under 1%, right now, all we need is appreciation above 1% for these strategies to be good longterm.

Tim D: The first one that comes to mind is intra-family loans. That's pretty easy, it's a loan to a family member. Again, in order to have a loan to a family member be regarded as arms length, you have to charge arms length interest. If you can do that at the applicable federal rate, again, below 1% right now, you can loan those assets or the cash to your next generation. They can invest it, hopefully earn a great rate of return in this recovering environment, and only pay a small amount of interest. At the end of the loan, you pay it back and the next generation keeps all that appreciation that they've had. A subtle strategy, you can combine it with some sort of annual gifting exclusion or exemption amount that you can apply each year in order to amplify it a little bit, but simple strategy and very effective strategy. Plus, you don't have to really lose those assets longterm it's just a loan. That's the first big one.

Tim D: Then, we get into two more difficult to understand strategies called the GRAT, the grantor retained annuity trust, and a CLAT, which is a charitable lead annuity trust. We'll talk about the GRAT first, because that's a little bit interesting. Do you have any clients with GRATs?

Justin S: No, but I think about it all the time. We can do some rolling GRATs, do some fun stuff like that. Anybody wants to, be sure to reach out to-

Tim D: That's right.

Justin S: Appetite to execute these great ideas we have.

Tim D: Exactly. With a GRAT, a grantor just puts assets into a trust for the next generation, but that grantor retains an annuity interest. Basically, a stream of payments back from this trust for a specified period of years. That annuity stream is based on the section 75-20 rate, which is very low right now. When you discount that, to figure out what their retained interest is in that trust, a lower discount rate means a higher present value. The retained interest is very high, which means that there's not a big gift that you're giving to that next generation for the excess that's deemed to go to that next generation. Again, for this strategy to be effective, the trust just needs to hurdle that section 75-20 rate in order to be an effective transfer-

Justin S: As long as the portfolio of securities, or whatever's, inside of the GRAT, it doesn't have to be securities, right? We can put other stuff in there.

Tim D: Assets, assets of some sort. Hopefully highly appreciating assets.

Justin S: They highly appreciate above the AFR rate, which is 1%-ish now.

Tim D: Yeah, the section 75-20.

Justin S: Oh, 75-20, okay.

Tim D: There's two different ones here to be mindful of.

Justin S: Okay. All right. 75-20. We crossed that hurdle rate and that appreciation is tax free transfer, basically?

Tim D: Yeah. There's no transfer tax cost for what it's appreciated above and beyond that, whatever that retained interest is that the grantor is retained. It freezes that back into their estate, anything above and beyond, it's transferred, transfer tax free to the next generation. Again, you can combine these with the variety of trust strategies and rolling trusts, and you can try to zero out the gift. That's the other thing they try to do is retain a high enough interest in this annuity stream to maximize the value back into these grantor's estate. As long as the asset appreciates very significantly, when it's gone, it's gone. It's very good, very interesting.

Tim D: The CLAT is just the same thing other than that instead of that annuity stream going back to the grantor, that annuity stream is going to a qualified charity over a specified period of years. Again, the difference in the value going to that charity versus the value at the end, going to your next generation is all actuarily determined and based on that discount rate that annuity interest is presenting.

Justin S: Very interesting. For our clients that do have philanthropic, because a lot of people aren't feeling is philanthropic these days with taking a look at your March and April investment statements.

Tim D: Yeah, absolutely.

Justin S: Perhaps they can still benefit charity during this period of time and take advantage of the environment that they've been given.

Tim D: Absolutely. It goes along with the current environment, there's plenty of need for charity right now. Also, if you've read back at some of our previous documents or previous articles that we've published, we talked about that bunching strategy, and this is a way to achieve a nice big bunch in the one year, first year, transfer to this charity. Bunch all of your deductions in one year and have them parceled out over the future years. Effective in that regard too.

Justin S: Yeah, very good. All right. We talked about how to take advantage of low interest rates now, talked about depressed asset prices and the transfers of those, talked about how we think, unfortunately, taxes probably aren't going down from here after the end of the Tax Cut and Jobs act, and we talked about perhaps a $4 trillion extra tax bill we're going to have coming due. Quite a bit going on here in the discussion, anything you wanted to touch on that we didn't discuss already?

Tim D: No, I think it's just that it's an interesting time. Again, as you mentioned before, it's not the most comfortable time to consider giving away assets, but these periods present themselves only once in a while in a generation where you can take advantage of an environment as ripe as this to transfer assets to the next generation at a relatively low cost. It's worth a discussion with your advisor, I think is the main takeaway here. There's certainly strategies that aren't going to fit your family circumstances, ones that you're not going to want to deploy, but every little bit helps. If we can do something that's at least palatable to you and effective for your family, I think it really helps preserve assets for generations to come.

Justin S: Absolutely. It's an uncomfortable time to be making these sort of things, but at the same time, in a couple of years, we are going to look back at the great decisions that were made and the hopefully great tax dollars that we've saved. Well, thanks everybody for taking the time to watch us today. This was Market Watch on COVID-19 here at Sanderson. We'll look forward to doing some more of these in the future. Take care.

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