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Estate Tax Planning Opportunities With COVID-19

By | COVID-19 | No Comments

COVID-19, social distancing, and sheltering-in-place brought new changes to our perspectives and the need to re-evaluate current estate planning documents (or lack thereof).  COVID-19 has created a stew of significant factors creating opportunities to maximize estate tax planning in the near term. 

What are some of these Factors?

The gift and generation-skipping tax (“GST”) exemption amounts remain high and currently stand at $11.58 million. These exemptions are temporary and will be cut in half in 2026.

Interest rates were already near historic lows but the Federal Reserve’s response to COVID has led to a reduction in interest rates that will produce perhaps the lowest rates in history for estate planning purposes.

Valuations of securities have been depressed. This has impacted valuation of a wide range of businesses and other properties because of the slowing economy due to mandatory closures and quarantines and other factors. Thus, this is an opportune time to transfer assets out of any wealthy client’s estate.

Taxes will have to go up to get the economy going so the government can spend, spend, spend no matter which political party wins in November. Higher tax rates; lower exemptions; loss of step up in basis; elimination or reduction in discounts; essentially an elimination of GRATs are all possibilities. With this background in mind, here are some options in this new environment.

  1. Grantor Retained Annuity Trusts (a.k.a. “GRATs”)

A GRAT is an irrevocable trust whose objective is to remove appreciation from the grantor’s estate. A GRAT is created when a grantor contributes assets with appreciation potential to a fixed-term, irrevocable trust. The grantor then retains the right to receive an annuity stream over the trust's term. At the end of the term, the assets are distributed to noncharitable beneficiaries — typically, the grantor's children. The amount of the annuity payment required to be paid to the grantor during the GRAT term of the is calculated by using an interest rate the IRS determines monthly called the Section 7520 rate. The section 7520 rate for May 2020 is an astoundingly low 0.8 percent. In other words, the IRS is assuming the assets will grow at just 0.8%. If they grow faster than that, the excess goes to the grantor’s children without using any estate and gift tax exclusion.

For clients that have not yet begun GRATs, now may be an ideal time to do so. With low interest rate and low stock market and other valuations transferring assets into a GRAT may be a valuable estate planning step.

  1. Intra- Family Loans

With historically low interest rates mentioned above, a very common and simple estate planning technique is for a client to make a low interest loan to a trust, family member, or family business entity, which could then invest to seek a greater return. It also follows that the lower interest rates provide an opportunity to see if notes can be renegotiated with a lower interest rate. This could be useful for cash flow planning and perhaps in certain transactions to reduce the negative income tax impact of interest payments. It’s possible that a mere change in interest rate could be viewed as a gift in a family context, but if the lender receives other benefits it may be feasible to re-negotiate the note without triggering a gift tax issue

  1. Valuation Considerations – Alternate Valuation Date

When someone passes away, Internal Revenue Code (“IRC”) Section 2031 states that the estate is valued as of the date of death for estate tax purposes. However, IRC Section 2032 permits the use of an alternate valuation date that is six months after the date of death for the estate’s assets where (1) the overall value the estate is less and (2) there’s a reduction in the estate tax. This technique hasn’t received much attention (or use) due to the market growth of the last decade, but it merits review with the recent market pullback from its highs. Depending on the length of the current market pullback and a possible contraction in the real estate market due to COVID’s effect, utilizing an alternate valuation date can provide significant benefits.

  1. Income Tax Considerations

Roth IRA Conversions.  Converting a regular or traditional IRA to a Roth IRA has been a common part of tax planning for some time. The SECURE Act, passed at the end of 2019, has eliminated the stretch IRA by requiring IRAs be liquidated in 10 years for all but a few situations and has brought even greater consideration to Roth conversions. A Roth conversion, or a series of incremental Roth conversions, are a possible means of reducing the negative tax impact of the 10-year rule under the SECURE Act. Put another way, rather than wait until the 10th year end following the plan holder’s passing to distribute and tax all plan assets at perhaps the highest tax bracket, consider converting the IRA in small yearly increments while the account holder is alive to a Roth IRA which may reduce the overall tax cost. With the stock market pullback reducing the IRA values, it’s a good time to consider converting traditional IRAs to Roth IRAs because the lower IRA values will result in lower tax cost, particularly at today’s lower rates.

Loss Harvesting. This is an extremely common tax planning technique. Typically, clients’ investment advisors endeavor to offset capital gains with capital losses to reduce taxable capital gains. With the nearly 10-year bull market this area hasn’t received much attention, so with the recent pullback, it is important to keep an eye out for these opportunities to reduce income tax exposure.

You can see that with the increased need for tax revenues, the halving of the exemption, interest rate environment and market environment, this presents a unique window of time to reduce estate and income tax exposure.

Contact a Morris Hall Estate Planning Attorney

To get started on your estate plan or if you have additional questions about estate planning, contact one of our experienced estate planning attorneys at Morris Hall, PLLC by calling 888-222-1328 to schedule your appointment today. For more information, please join us for an upcoming FREE webinar.

Five Estate Planning Strategies in COVID-19’s ‘Brave New World’

By | COVID-19, Estate Planning, Living Will, Preparedness | No Comments

Five Estate Planning Strategies in COVID-19’s ‘Brave New World’

 The sudden shock of COVID-19, social distancing, and sheltering-in-place has forced many individuals to review and address situations rarely discussed or considered, and new unthinkable realities.  While many older folks have dealt with such matters, many of us have been very fortunate in that we’ve never had to deal with sudden traumatic illness, sheltering-in-place, and increased isolation from family, friends, and neighbors. 

Many people are reaching out to us to implement estate plans they put off finalizing in the last year.  Some folks are calling to review and update their existing plans and others are calling to create estate plans they should have started years ago, motivated by the COVID-19 crisis. 

What many people don’t know is that attorneys are actively offering innovative solutions for clients to devise and implement a plan to provide peace of mind for clients and their loved ones.

Here are five things you should know to act now:

1. Use your time wisely

With so many people sheltering-in-place, it’s likely you have time to consider some of the critical issues you’ve set aside, such as who would you want to make financial or medical decisions if you fell ill and were unable to make your own? 

2. You can do estate planning from home

While you might be sheltering-in-place and unable to physically meet your attorney, you can still plan. Many attorneys working remotely are happy to consult via email, telephone, or video.  Attorneys can prepare documents and send them for your review via email, mail, or tracked delivery such as FedEx or UPS.

3. There’s more than one way to sign your estate plan documents

There are flexible and creative options to execute your estate plan documents.  Here are some ways attorneys are providing signing services while protecting clients and their team while following local social distancing guidelines:

  • Where appropriate, clients may execute their estate plan at the attorney’s office by wearing gloves and masks in a designated “clean” room;
  • Execute  estate plan at your home while wearing gloves and masks;
  • “Drive-up” signing allows you to sign your estate plan documents while sitting in your car.
  • Estate plans may be emailed to client to print and sign in their own home in the presence of a mobile notary.

4. Notaries for wills and trusts are not always required

Many state statutes may not require notarization to create a valid will or trust, even though it is common practice.  For example, in Arizona, a ‘paper will’ is valid if it is witnessed by two people.  Arizona also allows ‘holographic wills,’ which are unwitnessed wills whose material provisions and signature are in the testator’s handwriting. Although it is always advisable to have estate planning documents notarized, it is important to understand your options in case of an emergency.

5. Online notarization may be an option

Online notarization is a very new concept. Most states do not allow for online notarization.  Arizona now allows for online notarization, as of April 10, 2020.  In response to COVID-19’s sheltering-in-place and social distancing realities, some states may allow for temporary electronic notarization of documents during the pandemic. Check your jurisdiction for rules governing online notarizations.

Hopefully, this “Brave New World’ is temporary, and we can all get back to our regular lives.  Reach out to your attorney about how you can enact estate planning during this time.  At the very least, your plan’s documents can be ready to sign once sheltering-in place restrictions are lifted.

Bill is admitted to practice in Arizona, Massachusetts, and before the United States Tax Court.

The Danger of DIY documents

The Dangers of "DIY" Estate Planning

By | COVID-19, Estate Planning, Healthcare documents, Preparedness | No Comments

In response to fear, anxiety, and the uncertainty of the COVID-19 pandemic, many Americans are scrambling to create hasty estate plans, including end-of-life directives.  According to a recent online article, several companies have seen a spike in creation of online, Do-It-Yourself (“DIY”) wills, powers of attorney and health care documents.

When bad things happen, fear can motivate us to take action. Although fear is a great motivator,  rushing to put together a hasty DIY plan could result in unexpected consequences.

In 2016, my grandfather was scheduled for surgery and was told by his doctor that his healthcare documents were outdated, and that he would need to execute new documents. Fear and urgency made him rush to put together new estate planning documents and healthcare directives.

Instead of seeking the advice of a qualified estate planning attorney, my grandfather completed fill-in-the-blank forms online. The online “package” consisted of a statutory healthcare directive, a statutory Living Will, Medical Treatment Plan, Special Power of Attorney, and a Last Will and Testament.

To most people this would seem like a pretty straight forward and comprehensive plan. However, by filling out this DIY package, my grandfather completely unraveled his intended estate plan, which caused additional delay and resulted in expensive litigation.

Through the DIY package, my grandfather unintentionally gave the entire estate to his then current wife, which contradicted his previously established trust, letters, notes, and other documents evidencing his intent to distribute 50% of the estate to his wife and 50% equally to his children.

At Morris Hall, PLLC we have been helping families plan for life’s uncertainties for 50 years. During this novel time, our entire Morris Hall team remains ready to serve you. We encourage you to take action and create an estate plan that brings peace to yourself and your family. Don’t let fear paralyze you or cause you to make hasty decisions. We want you and your family to avoid the unnecessary costs, delay, and uncertainty that result from DIY estate plans.

Call to schedule a phone or video consultation with one of our qualified and caring attorneys to have your current estate plan reviewed or to establish a new estate plan that accomplishes your goals.


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