Estate Planning in the Time of COVID-19

Authored by Adam S. Garber and Steven L. Kriz

Many people have private, intrafamily loans as part of their overall estate plan. The IRS sets interest rates at certain levels called Applicable Federal Rates, and as long as the interest rate of the private loan is at or above the applicable AFR, no part of the loan is considered a gift. Since March 2020, the IRS has dropped the AFRs considerably, with the current rates now at historic lows, starting at .18% for short term loans (under three years), .43% for mid-term loans (between 3 and 9 years), and 1.01% for long-term loans (over nine years). Read more specifics here. Note: these AFR rates are unrelated to rates set by banks or institutional lenders. If you have free time, now is a good time to review your assets and overall estate plan to determine if you have any promissory notes in your estate plan that can be refinanced to reduce the total cost of any intrafamily planning.

On a related note, the historically low AFRs combined with relatively low asset values, and historically high estate and gift tax exclusions also present a unique opportunity to transfer wealth more effectively to the next generations, either by gift, sale, or a combination of the two. By using a sale technique, a member of a senior generation can transfer closely held assets at low values to a junior generation for a note without using any gift or estate tax. 

The low-interest-rate environment is also a boon for those who have already utilized their entire gift tax exemption (currently, $11,580,000 per person), or who want to transfer assets whose chance of appreciation does not necessarily warrant the use of gift tax exemption. A planning technique, called a Grantor Retained Annuity Trust (a “GRAT”), allows the creator of the trust to pass assets to intended beneficiaries free of gift and estate tax. In a GRAT, the grantor is entitled to receive an annuity for a period of years with any remaining assets passing to the remainder beneficiaries. The amount of the annuity is calculated based upon the value of the assets the grantor contributes to the GRAT and the interest rates published by the IRS. To the extent that the assets appreciate over the benchmark rate, the remaining assets will pass to the remainder beneficiaries estate tax-free.    

Although the COVID-19 pandemic has certainly affected markets, asset values, and the economy overall, it has presented planning opportunities as well. 

Now is a good time to look at your estate plan to see if you can benefit from utilizing advanced strategies that are impacted by asset valuations and low-interest rates.