These uncertain times have caused many of us to think about steps we might take to confirm that our affairs are in order and that we have prudently provided for our family members and other loved ones.  To assist with that review, we provide the following tips:

Perform an Estate Plan Wellness Check-Up

Review your existing estate plan documents and consider whether there are any changes to your family or financial circumstances that would warrant updates to those documents.  If you have no estate plan in place, now is the time to remedy that.

Does someone else know where you keep your important papers (life insurance policy, estate plan documents, computer passwords, a list of key advisors and accounts)?  Have you confirmed that the person you have designated as your successor trustee, executor, agent or other fiduciary is aware of and willing to serve in the appointed role?

Do your medical providers have a copy of your Advance Health Care Directive (or similar document) that authorizes an agent to make medical decisions on your behalf if necessary, and contains any guidance you wish to provide regarding health-care decisions?  Does your health care agent have a copy of your health care directive and have you discussed your wishes with your health care agent?

Planning Opportunities – A Rainbow Among The Turbulence

While the COVID-19 crisis has disrupted our financial markets and the broader economy, it also  presents opportunities to implement planning techniques geared toward economic downturns.  These include:

Gifting

An economic downturn presents an ideal time for making gifts, since the value of the assets you give away will be depressed.  That means you probably can give away more than you could just a month ago without paying any gift tax.  When the market recovers, the increase in value will be owned by your donee gift tax free.

Gifts can be made outright or in trust.  A gift in trust provides guidance for a beneficiary who is young or not fiscally prudent, provides creditor protection, confirms the separate property character of the trust assets if your beneficiary is married, and may be a tax efficient way to pass assets to future generations.

Of course, the benefits of making a gift in a depressed market must be weighed against the “carry over” basis rule, which provides that the donee will have the same income tax basis in the asset as the donor (and there will be no basis adjustment at the time of the donor’s death).

Generation Skipping Transfer Tax (GST) Planning

Did you make a gift to a trust that benefits grandchildren or more remote descendants but chose not to apply your GST exemption to the gift?  Or did you make a gift to a generation-skipping trust in 2019 but have not yet filed a gift tax return to report the gift and apply GST exemption to it?  The depreciated value of assets during a downturn also can be advantageous in making late allocations of generation-skipping transfer tax exemption.

A late allocation of GST exemption is applied to the value of the trust assets on the date of that allocation, not the value on the date of the gift.  So in times like the present, in which asset values likely have declined since the date of the initial gift, making a late allocation will allow the remaining GST exemption to apply to a greater portion of the trust assets than had previously been possible.

Grantor Retained Annuity Trusts (GRAT)

The current low interest rates provide an excellent planning opportunity for individuals looking to establish GRATs.  A GRAT allows a grantor to place assets into a trust for a specified period of time and receive an annuity payment during that period.  At the conclusion of the annuity period, any appreciation on the trust assets in excess of the monthly Internal Revenue Code Section 7520 rate will pass to the trust’s ultimate beneficiaries transfer tax-free.  The IRC Section 7520 rate is now at historic lows, so the appreciation that will pass to your beneficiaries gift tax free is likely to be high.

GRATs can be structured so that the appreciation in the GRAT’s assets passes to the designated beneficiary at the end of the annuity period without the use of any gift tax exemption or the payment of any gift tax, so they are a good alternative if you have already used your gift tax exemption in full.

Swaps

If you set up an intentionally defective grantor trust, likely the power that made the trust defective (so that the grantor continues to pay income tax on the income, even thought that income is distributed to the trust beneficiaries) is the power to take assets out of the trust and put in assets of equal value.  This is called a “swap power.”

In the present climate, grantors can strategically use this substitution power to swap low basis assets out of the trust and replace them with assets that have a higher basis.  Following such a swap, the lower basis assets reacquired from the trust will receive a basis adjustment upon the grantor’s death (via the inclusion of those assets in the grantor’s estate).

Promissory Notes

This may be a good time to make a loan to a child or other beneficiary, or to restructure loans that were made in the past and are still outstanding.  The interest rate currently mandated by the IRS is very low and can be locked in now for the future.

Charitable Lead Annuity Trust

A charitable lead annuity trust is a technique to consider in this low-interest environment if you have charitable intent.  In this type of trust, the trust pays a fixed dollar amount to charity for a period of up to 20 years.  As explained in connection with the GRAT above, at the conclusion of the term, any appreciation on the trust assets in excess of the monthly Internal Revenue Code Section 7520 rate will pass to the trust’s ultimate beneficiaries transfer tax-free.  The annuity amount to charity also can be calculated so that the present value of the gift for gift tax purposes can be very low.

Roth IRA Conversion

If you convert your existing traditional (i.e., taxable) IRAs to a Roth IRA, future earnings continue to be tax-free, and all withdrawals – by you or by your beneficiaries after your death – also are tax-free.  The price is that you must pay income tax now on the value of the traditional IRAs.

While the value of your IRAs may be low now, this is a good time consider a conversion to a Roth IRA.  You would pay current income tax on the temporarily lower value, and all future earnings and appreciation then will be exempt from income taxation.

IRA Contributions.

You now have until July 15, 2020 to make your 2019 contributions to your IRA.  If you have children who have earned income and qualify to make contributions, this will give them additional time to start saving for their retirement.