The COVID-19 public health crisis has led to a near complete economic shutdown. Stay at home orders, closures of non-essential businesses, and other measures taken to stop the spread of the Coronavirus have smothered the prosperous pre-COVID economy. While nobody would consider an economic downturn a good thing, from an estate planning perspective the current market conditions offer unique benefits for transferring estate assets to family members and trusts.
Let us explain further. Many tangible property items and paper investment assets are undervalued in terms of where they were prior to COVID-19 and where they are likely to go after the economy reopens. That means transferring depressed assets to loved ones and future heirs could allow you to reduce the value of your estate and your beneficiaries would be able to keep most of the upside appreciation when the stock market and broader economy regain lost value.
This is just one benefit of the Coronavirus economy. Another is the all-time low applicable federal rates, or AFR. Every month the Internal Revenue Service publishes new AFRs based on a number of economic factors, including prior 30-day average market yields of U.S. treasury obligations. The rates apply to loans between private parties, like family members. At record lows, loaning, or transferring, depressed assets to family members is incredibly cheap. It also allows the borrower to keep any future gains free of gift and estate taxes if he or she invests the loan and the investment appreciates in value.
Something else to keep in mind is that when you transfer estate assets their value is essentially frozen for estate and gift tax purposes. Thus, the lower the asset value the lower the corresponding tax liability. Additionally, transferring depressed assets could allow you to fit more into the annual federal gift tax exclusion. The government allows you to give away up to $15,000 a year without it counting toward a lifetime exemption, so cramming in depressed assets allows for greater asset transfers and future upside growth.
Well-timed wealth transfers are an effective way to achieve long-term estate planning goals. They are also complicated, however, and involve nuances specific to individual estate circumstances. For information and to ask your own questions, we encourage you to contact our office to schedule a meeting.