Estate planning may be top of mind for many in these uncertain times. If you have been meaning to tackle this subject or update your current plan, COVID-19 has created some incredible planning opportunities.
What makes the current environment so attractive?
Most estate planning strategies use interest rate arbitrage and/or discounting techniques to transfer wealth. Three factors have created the perfect storm:
- Low Interest Rates: Government (“AFR”) rates that can be used for estate planning currently range between 0.18% (short term) and 1.01% (long term). With proper planning, excess earnings can transfer to heirs tax-free.
- Depressed Asset Values: The current economic downturn has lowered the values of many assets and businesses. This forced discount makes it an opportune time to transfer them before they increase in value again.
- Looming Exemption Sunset: Married couples can currently gift ca. $23 million to heirs tax-free. These exemptions will be cut roughly in half at the end of 2025, or sooner, if Democrats win elections in November.
All that said, NOW is the time to act as we will probably never see such a favorable environment like this again.
Which strategies may be worth a closer look?
The most obvious strategy is to make gifts before exemptions expire. If you struggle with the concept of irrevocably parting with your money, some of the strategies below may be of interest as they offer added flexibility and control:
- Family Limited Partnership (FLP): Clients with illiquid assets can often take meaningful valuation discounts. FLPs may therefore be attractive for closely held business interests or hedge funds and private equity investments.
- Spousal Lifetime Access Trust (SLAT): A common objection to gifts is the foregone control thereafter. SLATs may be an attractive workaround as they grant one spouse indirect access to gifts made by the other spouse.
- Grantor Retained Anuity Trust (GRAT): GRATs are in vogue right now because transfers to them revert back to the grantor and excess earnings above AFR rates can transfer to heirs tax-free.
- Split Dollar Life Insurance: Split Dollar is not a policy but an acquisition technique under which costs and benefits of a permanent life insurance policies are shared between two entities. Gift, income and estate tax advantages are hard to match by other strategies.
Here is an excellent white paper from AALU that sumarizes the current environment and available planning opportunities (learn more).
Every client’s situation is unique and we don’t give legal or tax advice so please be sure to consult attorneys and accountants for proper guidance.
Why use life insurance?
Whenever estates above $11.5 million become taxable again, or whatever number our friends in Washington come up with next (sarcasm intended), a much broader audience will be impacted and look for cost effective solutions.
Estate planning is not a transaction but rather a dynamic process that often takes time. We also find that many clients are not as liquid as they think which can be problematic as estate taxes are due within nine months in cash.
Life insurance can 1) hedge other planning strategies if they take longer than expected or fail completely 2) provide tax-free liquidity for eventual estate taxes when they are due and 3) offer attractive long-term IRR’s that are not correlated to other asset classes. As such, it can greatly enhance predictability and stability of any estate plan.
Here is a great deck from Lion Street that explains how life insurance can move the risk profile of legacy assets into the Northwest quadrant of the efficient frontier (aka the best seat in the house with high return and low risk metrics) (learn more).
Where do I start and can you recommend other professional advisers?
Gather your wills, trusts and life insurance policies and engage your existing advisors to identify gaps and opportunities. If they are not helpful, nowhere to be found or it’s simply time for a change, we can connect you with the right professional(s).
Our firm is a preferred resource to many leading trust companies, T&E attorneys, family offices and wealth planners that can help you with the basics to the utmost complex.
Remember that estate planning is a team sport so involve all of your advisors to get well thought out and integrated advice. Equally important, communicate the plan to your family members to avoid unnecessary friction down the road.
Please get in touch with questions or if you would like to learn more.
Stay positive, healthy and safe.