Staying Positive During COVID-19: A Look at Gifting Opportunities for High Net Worth Individuals

Unfortunately for most of us, one of the many impacts of COVID-19 is a reduction in the value of our personal assets. Investment portfolios may be down 25% (or more) year to date, and with the Stay at Home orders in place and various business sectors upended, the value of many businesses is down as well. However, in the midst of this economic turmoil, a major transfer tax savings opportunity exists for those high net worth individuals who want to make significant gifts to their beneficiaries.

Currently, the Federal Transfer (combined Estate & Gift) Tax Exemption for an individual is $11.58 million.  Without new legislation, this value will sunset on December 31, 2025, bringing the exemption down to approximately $5 million, with adjustments for inflation. Gifts made now above and beyond the future exemption amount will be respected and transfer gift tax-free. We have been advising our clients whose assets are below the current exemption to consider gifting now for protection against a future reduction in exemption.  This holds true now more than ever, as gifting while asset values are low utilizes less of a transfer tax exemption, resulting in more assets that you can pass tax-free to your beneficiaries!

Consider the following techniques:

For the person whose financial needs are already met:

• Gifts to Intentionally Defective Grantor Trusts (IDGTs). IDGTs are a popular transfer tax planning tool that accomplishes a transfer of wealth between generations through an irrevocable trust and results in continued transfer tax savings following the date of gift as a result of the income of the trust being taxable to the grantor. The grantor does not retain a benefit from the assets transferred. The trust can be written to provide asset protection for beneficiaries against creditors and divorce.

For the person who is not quite set:

• Gifts to Grantor Retained Trusts. A gift to a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) is a gift to an irrevocable trust, where the grantor maintains a financial benefit from the trust for a period of years after the gift. Following the expiration of that period, the assets transfer to intended beneficiaries–either outright or in trust (which can again be written to provide asset protection for beneficiaries). Although the grantor retains benefits from the assets into the future, the value of the remainder gift for purposes of determining how much exemption is used is as of the date of the gift! Further, because valuing a remainder interest is tied to interest rates, which are currently low, now is a particularly good time to consider a Grantor Retained Trust.

Although we highlight the trusts above as particularly beneficial during these times, there are other types of irrevocable trusts that may be more suited to your personal needs. We are optimistic that the current economic situation will rebound, but less optimistic that the transfer tax exemption will remain high, so the time to act is now!