Forbes - June 22, 2020
The stock market may have rebounded, but questions linger about the future now that we’re in an official recession—and a bad one, from the looks of things. The environment is different nowadays, especially since Congress passed its rescue package and the Federal Reserve reduced short-term rates to near-zero. How should people do estate planning now? Andrew Holstine, a partner at the law firm of Schoenberg Finkel Newman & Rosenberg in Chicago, pinpoints four important areas to plan for, and tells us how to do this:
Larry Light: How does the Fed’s rate reduction affect estate planning?
Andrew Holstine : These benchmark rates are used by the IRS to set rates used in a variety of personal and estate planning tools such as family loans, charitable trusts and grantor retained annuity trusts or GRATs.
These factors, and the current economic environment, affect family businesses differently and, not surprisingly, there is not one solution for everyone.
Light: Business succession is first on the list. Holstine: Now is a great time to review this plan and stress test it to determine if your plan still meets your goals. For example, you can critically evaluate if the payout formula is equitable or if the plan is well-funded. Additionally, if you are looking to pass equity in your company to the next generation, now can be an ideal time to accomplish this in a tax-efficient manner.
Light: And then there are intrafamily loans.
Holstine: It is not uncommon for one generation to help finance succeeding generations, usually through a combination of gifts and loans. If you are in a position financially to support your descendants, now is a great time to make this happen. Also, if you have an existing loan, you can refinance it. But you should be cautious before making any adjustments. There are simple precautions you should take before changing loan terms that avoid an IRS challenge.
Light: And wealth transfer, via a GRAT? Like what happens if there’s not enough money left in the GRAT dad set up to pass to the kids after he uses it up to fund his annuity?
Holstine: You should review your existing GRAT or create a new GRAT to transfer wealth. A GRAT is a trust intended to transfer appreciating assets to your beneficiaries tax-free. A parent might contribute assets to the trust, agreeing to receive a series of annuity payments. These payments are a return of principal plus a rate of return based on current interest rates. After annuity payments are made, remaining trust assets are passed to your beneficiaries. A low interest rate plus appreciating assets increase the likelihood of significant wealth transfer. If the assets owned by the trust do not appreciate, nothing is transferred and the GRAT fails.
If you have a GRAT, you should review this now to determine if it is likely to fail. Instead of waiting for such a failure, you can unwind the existing GRAT and create a new GRAT to hold the devalued assets. A proactive review can greatly increase the likelihood of success in passing wealth to your beneficiaries tax-free.
Light: And the fourth area, generation-skipping trusts, where the grandparents would bequeath their money to their grandchildren, thus skipping over the middle generation and avoiding estate taxes?
Holstine: If you are the grantor or beneficiary of an irrevocable trust or if you desire to maximize assets that you leave to your family exempt from generation-skipping transfer tax, there are strategies to leverage these trusts and maximize trust assets.
For instance, a grandparent can make a gift to a trust for grandchildren, seeding this trust with assets. The trust can then purchase devalued assets from the grandparent using an installment note at a low interest rate. The grandparent receives a series of payments on the note while transferring substantial assets out of their estate, avoiding estate tax, and leveraging the current market. This same concept works for any existing irrevocable trust, such as a family trust or existing GST trust, moving assets that are subject to estate tax into a trust that is exempt from estate and generation-skipping transfer taxes.
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