A commitment to employees, clients and community: The Bonadio Group’s response to COVID-19. View Here

Deflated Values and Low Interest Rates Create Planning Opportunities

Even in the direst of times, there can be opportunities amid the chaos. Values are down –portfolios, possibly business valuations, and real estate. However, a silver lining in otherwise bad news, this current environment could be positive for some. Additionally, rock-bottom interest rates, which aren’t good for our bank accounts, can be advantageous for some planning strategies.

Succession Planning

If you’ve been thinking of transferring your business to heirs and can afford to gift it or sell it to them for the lowest value possible, maybe even for a note, now would be the time to take advantage of the current low values and/or interest rates.

Enhanced Gifting Leverage

If you have a taxable estate, now is an opportune time to make gifts. If you have a federal taxable estate and want to lock in the temporary $11.58M federal exclusion before it goes away, you can transfer more units now for the same gift value. Let the eventual rebound happen in their hands. If you have a state taxable estate, but not federal, and therefore wish to preserve as much of your federal exemption as possible, you can now make the same gift but at a reduced gift tax value, using less of your exclusion. Either way, a significant amount of wealth can be transferred free of any gift tax. How?

  • Outright Gift – You can make gifts of assets directly to individuals for them to do what they want with.
  • Irrevocable Trust - There are many tax and non-tax reasons to gift to heirs in trust rather than outright.

Intentionally Defective Grantor Trust (IDGT)

Gift and/or sale to an IDGT – You can make a gift at current low values. Or you can sell some assets to this kind of trust and take back a note. The interest rate on a note the trust would have to pay you to make this technique even more effective in current times.

Grantor Retained Annuity Trust (GRAT)

GRATs allow you to transfer wealth to your heirs at the end of some chosen time period while making annual payments to you in the meantime. Since your heirs will not receive the assets for a while, the transfer value to the trust is frozen and discounted for gift tax purposes. That discount deepens with values and interest rates being so low. It can even be structured in such a way as to not have any gift tax impact.

Charitable Lead Annuity Trust (CLAT) – CLATs work similar to a GRAT where they pass wealth to your heirs at the end of some time period while making annual payments (to charity) in the meantime. The transfer to the trust is a gift that benefits from the current environment in the same way the GRATs above do. If you make generous annual cash contributions to charity, this may be a perfect opportunity to leverage those charitable contributions you already make to transfer wealth to your heirs at a discount.

Other Wealth Planning Strategies

Intra-family Loans – You can make loans to heirs at significantly low-interest rates right now, lower than they can get through a bank. You can also refinance prior loans. Now maybe the time to help a family member. Maybe they can get or refinance a mortgage through you (note that the mortgage must be secured by the home for the interest to be deductible).

Roth IRA Conversions – Conversion or partial conversion of a traditional IRA to a Roth IRA can be advantageous for income tax and wealth transfer purposes. Generally, accumulations in a Roth IRA grow tax-free. To start that clock ticking, income tax is due on the traditional IRA balance that is converted to a Roth IRA. Depressed IRA values may result in lessened income taxes due to conversion.

For a younger person, conversion can make sense for income tax purposes and to avoid future mandatory distributions that are required from a traditional IRA.

Suppose after doing retirement planning projections, you realize you won’t need all those retirement assets during your lifetime. A Roth IRA can be an effective vehicle to pass that wealth to your heirs. You could accumulate more tax-free wealth in the Roth IRA since there are no minimum distribution requirements. On conversion of the IRA to a Roth IRA, you essentially freeze that IRA asset’s value for income tax purposes by paying the income tax on it on conversion. From that point forward, any future growth escapes income taxation, even for your heirs. You are essentially giving them a further gift, gift tax-free, by paying the income tax they otherwise would’ve paid on IRA distributions. Additionally, the income tax you pay on the conversion reduces your estate and potential estate taxes.

The tax-free treatment of qualified distributions from Roth IRAs are maybe even more valuable after the SECURE Act. The new law requires retirement accounts to be fully distributed to heirs within 10 years. That can wreak havoc on their income taxes that wouldn’t happen with a Roth IRA.

Seize the opportunity the current economic environment provides.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.