Wealth Transfer Opportunities Amid the Uncertainty of COVID-19
Given the recent stock market decline, now may be an opportune time to take advantage of discounted gifting strategies. Dominick Parillo describes a few wealth transfer strategies you may want to consider.
Given the recent stock market decline due to the economic uncertainty over the outbreak and spread of COVID-19, now may be an opportune time to take advantage of discounted gifting strategies.
The Tax Cuts and Jobs Act of 2017 raised the federal estate tax exemption to $10 million per person (currently $11.58 million per person adjusted for inflation). This means that a married couple has a combined federal estate tax exemption of $23.16 million. Without congressional action, at the end of 2025 the federal estate tax exemption amounts are set to revert or “sunset” back to pre-TCJA levels of $5 million per person (approximately $6 million per person adjusted for inflation or $12 million for a married couple).
If you are grappling with a taxable estate, depressed market values may allow you to transfer assets out of your estate with lower gift tax costs.
Here are a few wealth transfer strategies to consider:
2503(c) Gifting Trusts
A 2503(c) is a trust that qualifies for annual exclusion gifting (currently $15,000 per year) and protects assets for the beneficiary until the beneficiary attains age 21. The trust can be extended beyond age 21 to age 35 with a crummy power. You can set up 2503(c) trusts for minor children or grandchildren, transfer depressed portfolio holdings into the trust, and thus transfer the future appreciation of the assets to the trust beneficiaries. The beauty of leveraging the annual gift exclusion on depressed asset values is that you can transfer up to $30,000 in assets to any single beneficiary through gift splitting with your spouse and incur no gift tax cost. If you have four children, that means you can transfer $120,000 gift tax free.
529 Plans
A 529 Plan is a tax-advantaged account that allows contributions to grow tax-free. Withdrawals are also tax-free if used for qualified education expenses. You can set up 529 accounts for your children or grandchildren and frontload the accounts with up to five years of annual exclusion gifts. If you elect gift splitting with your spouse, you can contribute up to $150,000 per child or grandchild, all in one year. The contributions can then be invested at depressed market values, giving your children or grandchildren an opportunity to benefit from future growth.
Grantor Retained Annuity Trusts (GRATs)
A GRAT is a trust that pays an annuity back to you (the grantor). At the end of the annuity term, the remaining trust assets pass to your children or grandchildren. The annuity payments can be structured in a way to greatly reduce or eliminate the gift tax cost by returning the original principal contributions with interest determined by the IRS back to you. GRATs work best with assets that have high growth potential, so funding a GRAT with depressed portfolio holdings may allow you to transfer a significant amount of wealth to your family with little to no gift tax cost.
Family Limited Partnerships (FLP)
Utilizing an FLP structure can allow you to leverage your federal estate tax exclusion by taking advantage of lack of control/minority interest discounts and lack of marketability discounts. Initially you own 100% of the FLP (both the General and Limited Partnership interests). Over time, you can gift Limited Partnership interest to your children or grandchildren. Because the Limited Partners do not participate in management decisions, you can potentially utilize lack of control discounts/minority interest discounts that can range from 5% to 15%. In addition, because the FLP is a private company and does not have ready buyers and sellers, you can potentially take advantage of lack of marketability discounts that can range from 10% to 30%.
Charitable Lead Trusts
If creating a charitable legacy is important to you, you may be interested in establishing a Charitable Lead Trust. When you fund a Charitable Lead Trust, a charity of your choosing receives an annuity from the trust and you receive a charitable deduction equal to the present value of the annuity based on IRS interest rates. The present value of the remaining trust assets passing to your children or grandchildren is considered a taxable gift, but the gift is discounted because of the present value of the charitable annuity. Thus, a Charitable Lead Trust allows you to both leverage your federal estate tax exemption amount via discounted gifting and receive significant charitable deductions.
During these uncertain times, please focus on your health, family and overall wellness. We are all in this together and your Savant team is here for you. Please contact your Savant advisor if you are interested in further exploring any of the discounted gifting strategies discussed.
Dominick J. Parillo
Director of Wealth Transfer