Latimer LeVay Fyock, LLCLatimer LeVay Fyock, LLC

Gifting Strategies During a Pandemic

Puneet  Cham

Why Now Is The Right Time to Consider Gifting As Part of Your Estate Planning

So much about our current circumstances involves the things we can’t do. But just as there are many actions we can take to help our friends, neighbors, communities, and front-line workers during the pandemic, we can also take positive steps to protect and preserve our wealth for the brighter future that undoubtedly will come.

A unique combination of low asset values and high gift tax exemptions presents a rare opportunity to maximize the benefits of gifting strategies as part of your comprehensive estate planning. This is particularly important for individuals who face potential estate tax liability.

The Upside of The Down Market

The very numbers which make looking at your latest brokerage account statement a horrifying experience are the same numbers that make gifting a potentially lucrative endeavor. The inevitable future appreciation of your currently cratering assets is the tax-advantaged lemonade you can make out of the market’s lemons. Here’s why.

Using lifetime gifting strategies, you can transfer assets up to the amount of the federal estate, gift, and generation-skipping transfer (GST) tax exemptions prior to paying any transfer taxes. The Tax Cuts and Jobs Act of 2017 increased these exemptions to an all-time high. For 2020, the exemptions are $11,580,000 per person or $26,130,000 per married couple. In addition to these lifetime exemptions, you can gift up to $15,000 annually or $30,000 per married couple to one or more individuals without incurring a gift tax or eating into your lifetime exemptions.

The value of an asset for purposes of the gift tax exemption is its fair market value at the time you gift it. Any appreciation in those assets after you transfer them is no longer part of your estate, and therefore is not considered when calculating your taxable estate. That is why gifting when the value of your investments is low is so advantageous.

By gifting such assets now, you can use less of your exemption amount and leave ample room for future tax-free gifting. When the value of those gifted assets bounces back along with the market generally, all of that increased value accumulates without implicating the exemption or being subject to transfer tax. And the earlier you make a gift, the longer it can grow outside of your estate. As a bonus, if the recipient of your gift is in a lower income tax bracket than you, any post-gift income generated by the gifted asset will be subject to a lower tax rate, leading to additional overall tax savings.

Another reason to make gifting an estate planning priority is that the high federal exemption won’t last forever. In fact, the federal estate, gift, and generation-skipping transfer exemptions are set to revert to $5 million, adjusted for inflation, on Jan. 1, 2026. But it could be cut well before then depending on the outcome of this year’s election and the volatile political and economic climate of the next few years. According to the Internal Revenue Service, gifts made before any future decrease in the exemption won’t be taxed retroactively.

Low Interest Rates Make Gifting Particularly Attractive

In addition to a down market, historically low interest rates also add increased value to gifting. That is because interest rates influence how the IRS values wealth transfers for tax reporting purposes. Every month, the IRS issues its “Applicable Federal Rates” (AFRs). The lower the AFR, the more likely it is that an asset’s appreciation will exceed what’s called the “hurdle” rate, and beneficiaries will receive a greater share of assets tax-free.

Outright gifts and inter-family loans can take advantage of these rock-bottom rates. Another option is gifting through a trust. Several specialized trusts are particularly well-suited for gifting. Two such mechanisms that are worth considering are the Grantor Retained Annuity Trust (GRAT) and the similar Charitable Lead Annuity Trust (CLAT).

Grantor Retained Annuity Trust

Through a GRAT, you can transfer the growth and appreciation of assets to trust beneficiaries at a reduced gift and estate tax cost. You do so by transferring assets you expect to appreciate into this irrevocable trust while retaining an annuity stream for a fixed term. At the end of the term, the trust passes the remaining assets to family members or other beneficiaries outright or in further trust.

Although your transfer of assets to a GRAT is considered a gift, the gift amount is reduced by the actuarial value of the annuity you retain. This means that the amount of the taxable gift may be much smaller than the value of the assets transferred. If the asset’s growth outperforms the AFR hurdle rate, the additional increase is transferred to the trust’s remainder beneficiaries free of gift and estate taxes.

Charitable Lead Annuity Trusts

If you are interested in achieving philanthropic goals as part of or in addition to your wealth preservation and transfer strategy, you can fund a CLAT with assets that you expect will appreciate in the future.

A CLAT is similar to a GRAT, but instead of the annuity stream going to the grantor, it goes to the grantor’s designated charity during the specified term. At the end of the term, your intended beneficiaries will receive the trust assets. If structured as a Grantor Trust, the value of the annuity stream in the transfer year of the CLAT can be treated as an income tax deduction for you. Your taxable gift at the time of contribution is an amount equal to the fair market value of the assets, minus the value of the annuity stream received by the charity.

If You Have Estate Planning Questions During These Difficult Times, We’re Here For You

While no one knows how or when, these times will pass. As we all ride this out together, the attorneys and staff at Latimer LeVay Fyock will be here for you. If you would like to discuss gifting strategies or any other estate planning matters, please reach out to us.

Stay well.