Lemons into Lemonade: Now is a Prime Time to Transfer Wealth to the Next Generation

There is great uncertainty in our country today.  Americans are worried about their health and their livelihood. Many businesses are struggling.  Although the stock market has recovered in recent weeks, stocks are generally trading at lower values than in 2019 and the day to day markets are still unpredictable.  Across the board, Americans feel a sense of trepidation about the future.

Some good news in all of this is the unique opportunity in 2020 to transfer wealth to the next generation at a potentially significantly reduced value and with a much lower tax bill than might be incurred in the future.  Certain realities and potential uncertainties that exist this year make now the time to seriously consider gifting or using other transfer strategies such as grantor retained annuity trusts (GRATs), sales to intentionally defective grantor trusts, and generation-skipping transfers to move wealth from senior family members to lower generations.

Consider these unique factors in 2020:

• The Covid 19 crisis and uncertainty over economic recovery may mean lower value on publicly traded stocks, certain types of real estate, and other business assets and a resultant lower value and larger valuation discount on business ownership interests in these businesses.
• The large personal $11,580,000,000 basic applicable exclusion (“BAE”) from federal estate and gift tax and the large personal $11,580,000,000 generation-skipping transfer (“GST”) tax exemption are both still available.
• With the November elections looming, if there is a change in Washington, D.C. as a result of the elections, the BAE and GST exemption currently available until December 31, 2025, could be decreased by a new Congress, potentially retroactive in 2021 to as early as January 1, 2021. Some advisors speculate that the BAE and GST exemption amounts could each be decreased to $5,000,000, or $3,500,000, or lower.  The possibility of a decreased BAE and GST exemption and an increased rate of estate and generation-skipping tax on the wealthy would be one way for the government to raise funds to pay for the trillions of dollars of government aid delivered this year. (Currently, the estate tax rate is 40%, but in 2001, on estates over $3,500,000, the rate was 55%, and for over 40 years from 1935 through 1981, the rate on the largest estates was 77% to 78%.)
• The applicable federal rate (AFR) published monthly by the Internal Revenue Service is at an all-time low. The Section 7520 rate, used for measuring the value of annuities and other limited interests and used in the GRAT transfer planning strategy is .6% in July 2020.  The midterm (3-9 years) AFR annual interest rate used on intra family loans and sales and other transfer strategies is .45% in July 2020.

Many individuals who own family businesses or have acquired wealth over the years have delayed making a decision on whether to make lifetime gifts to the next generation to utilize the large BAE and large GST exemption.  They have reasoned that the $11,580,000 BAE and GST exemption which both became law under the 2017 Tax Cuts and Jobs Act are available until December 31, 2025.  Some indecision has been caused by the fact that lifetime gifts will not receive a step up in basis for income tax purposes.  However, the possibility of a 40% or higher estate tax and generation-skipping tax rate on a much lower threshold of value may far outweigh the income tax basis considerations.

Delaying the transfer of wealth to the next generation may no longer be the best decision considering the uncertainties and realities of 2020.  If transfers are to be made before the end of 2020 during the current economic climate which in many instances will lead to a lower valuation of the transferred assets, and to take advantage of the large BAE and GST exemption and the current the low AFR rates, planning for implementation should start as soon as possible.