Tax and Estate Planning Perspectives
From a tax and estate planning perspective, we would like to make you aware of the following:
Tax Filing Extensions:
The IRS has extended the filing and payment deadline for all 2019 income tax returns to July 15, 2020. This means that no penalty or interest will be assessed for an individual’s failure to file or pay income taxes, regardless of amount, until after July 15, 2020.
The IRS has also extended the filing deadline for gift tax returns. If you are required to file a gift tax return for gifts made in 2019, you must either file or extend the return by July 15, 2020.
Please note, however, that the IRS is still processing returns and issuing refunds. Therefore, if you are owed a refund, you should not hesitate to file prior to the July 15, 2020 deadline.
States are also extending the deadline for filing state income tax returns. Currently, the states of Colorado, Idaho, Montana, New Mexico, and Utah and the District of Columbia have extended their filing and payment deadlines. We encourage you to discuss the deadlines with an estate planning attorney or your accountants.
Estate Planning Documents:
We recommend that you ensure that your Healthcare Power of Attorney and General Durable Power of Attorney (including those for children 18 and older) are up to date and available. Generally, financial and healthcare institutions will accept copies of these documents. You do not need to present an original.
Now is a good time to review your estate planning documents and ensure that your current wishes about fiduciaries and beneficiaries are reflected. In addition, state bar associations are expected to issue guidance that would allow us to remotely witness and notarize the execution of these documents.
Business Succession Considerations:
If you have a family business, we know that you have been focused on contingency plans for many aspects of the business. In conjunction with that, succession planning for the leadership of control of the company may need to be reviewed and updated.
Wealth Transfer Considerations:
Given the upheaval in the economic markets and the lowering of interest rates, you may want to review any wealth transfer plan to ensure that it is meeting your objectives and review new strategies to optimize your plan. Generally, from a wealth transfer point of view, low asset values and low interest rates can represent an opportunity. Of course, each client’s circumstance is unique. A short list of actions to consider is set forth below.
Grantor Retained Annuity Trusts (“GRAT”):
A GRAT transfers appreciation in assets contributed to the trust to your heirs (or trusts for their benefit) at a minimal estate and gift tax cost. Generally, the creator of a GRAT gifts assets to the trust while retaining the right to receive an annual payment from the GRAT for a period of time (2-5 years). Upon termination of the time period, the remaining assets in the GRAT, if any, are transferred to your heirs. Thus, if the assets in the GRAT appreciate at a greater rate than needed to make the annual payments, the remainder passes to the trust’s beneficiaries at a very low tax cost. It is generally a good time to create a GRAT when assets are undervalued and interest rates are low. This is because a GRAT works best when its assets appreciate over the course of the GRAT’s term.
- If you established a GRAT recently, you should review whether the assets in the GRAT have declined substantially in value. In such a case, there are actions you can take to potentially establish a new GRAT with the GRAT assets at their current low value.
- If you have not yet established a GRAT, it could be a good time to do so with assets that are depressed in value. Given the current low interest rate environment, the GRAT assets need only appreciate at a very low rate to transfer wealth to your heirs at a minimal estate and gift tax cost.
Direct Gifts:
You should also consider undertaking the relatively simple wealth transfer technique of making direct gifts of undervalued assets to your heirs or trusts for their benefit. By transferring assets now, any appreciation in those assets over time will inure to the benefit of your heirs free of gift and estate tax. Currently, the amount that one can transfer free of estate and gift tax during lifetime or at death is $11.58 million ($23.16 million for a couple). Many individuals are considering utilizing their exemption before it decreases in 2026. With lower asset values, it may be a good time to move forward with these plans.
Refinance Promissory Notes:
To the extent that your heirs or trusts for their benefit owe you funds pursuant to a promissory note, you should consider refinancing the promissory note to make it less expensive for your heirs/trusts for their benefit to repay you. Interest rates are at an historical low (for example, the IRS minimum rate for a three- to nine- year note made in April is 0.99%). By reducing the interest rate on loans, your heirs will retain more wealth over time and retain more of the appreciation in the assets that you sold to them.
Irrevocable Grantor Trusts (sometimes called Dynasty Trusts or IDITs):
It is also a good time to review the assets held in any irrevocable grantor trusts you have established for your heirs. It may be advantageous to use the “swap power” in a grantor trust to ensure that appreciating assets are held in the trust and low-basis assets are held in your estate.
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