Managing Your Trust & Estate Strategies During COVID-19

As you respond to the immediate impact of the COVID-19 pandemic on your business and finances, your trust and estate plans may be the farthest thing from your mind. Lisa Rispoli, CPA, AEP, TEP, Grassi’s Trust & Estate Services Leader, explains why this economic environment may actually be the best time for you to execute gifting strategies to achieve greater tax savings and preserve more wealth for your loved ones.

Q. Is now the right time to make changes to my trust & estate strategies?

A. It may go against your instincts to make any financial moves in a depressed economy. But with many asset values so low and the lifetime gift tax exemption still so high, this may be your ideal window of opportunity to be gifting assets that will appreciate in the future.

The increased exemption, which is $11.58 million per taxpayer for 2020, is due to revert back to pre-TCJA levels (estimated to be approximately $6 million) in 2026. However, this could happen much sooner if the government needs to find ways to recoup lost revenues due to COVID-19 relief efforts, or if the 2020 elections result in a change of power in Washington.

High-net-worth taxpayers should also keep a close eye on estate tax changes as federal and state governments look for ways to recoup budget shortfalls in the wake of the pandemic. Protestors in New York have already been calling on Governor Cuomo to increase the estate tax on ultra-high-net-worth residents to help the state recover COVID-19 losses. Trust, estate and gifting strategies that can be utilized prior to these potential repurcussions are recommended.

Q. What types of trusts should I consider in this economic environment?

A. The decreased values of many investment portfolios, real estate assets and businesses make gifting an attractive option right now. Gifting to trusts is always the preferred way of transferring assets to beneficiaries.

The Intentionally Defective Grantor Trust (IDGT) requires the Grantor to continue to pay the income tax on the income generated by the assets gifted to the IDGT. The payment of the income tax by the grantor is a tax-free gift by the grantor every year.

Because the IDGT does not “exist” for income tax purposes, transactions between the grantor and the trust are ignored. A grantor can sell an asset to the trust at fair market value and take back a promissory note. Transferring the asset to the IDGT “freezes” the value of the asset in the estate of the grantor. The promissory note does not increase in value. This allows for the future growth of the asset to occur estate tax-free.

Grantor Retained Annuity Trusts (GRATs) perform well in low-interest environments. If you have assets that you expect to increase in value, consider transferring them to a GRAT under the current low IRS hurdle rate of 0.80% for May 2020. The GRAT will make annuity payments to you (the grantor) for a fixed number of years before the asset is transferred to the beneficiaries. This strategy will be successful if the future appreciation of the assets exceeds the current IRS hurdle rate, which, under the current rates, should be much easier to achieve.

These are also particularly effective techniques for taxpayers who have already gifted up to their lifetime exemption amount and want to continue to transfer assets to a trust while minimizing tax obligations.

Q. What other gifting strategies should I keep in mind?

A. If you are not ready to completely give up cash flow asset(s) quite yet, you may want to consider a Spousal Lifetime Access Trust (SLAT), which is established for the benefit of your spouse. This will allow you to gift the assets tax-free, up to the increased lifetime exemption, but still retain indirect access to the funds while your spouse is alive and married to you.

With the federal rate for long-term loans (maturities of 9 years or more) at only 0.99% in April 2020 (down from 2.15% in February 2020), intra-family loans are another cost-effective way to provide funds to family members, especially if they have suffered financially from the COVID-19 crisis.

Q. What other steps can estate owners take to gain some peace of mind during these challenging times?

A. In this time of uncertainty, particularly around our health, it is only natural that people are starting to think about the non-financial elements of their estate plans. We are hearing from many clients who want to create a living will, reassess their wills, assign a healthcare proxy or revisit their beneficiaries.

This is something we recommend all year round as part of a comprehensive trust and estate plan, long before someone has to face this decision for themselves or a parent. Having advance directives in place could certainly bring some added peace of mind during an understandably frightening situation.

Q. How can I execute trust & estate strategies if I’m quarantined?

A. Some states already have permanent laws in place allowing for remote online notarization. Others, such as New York, Connecticut, New Jersey and Pennsylvania, have temporarily allowed remote e-notarization through governors’ executive orders under a state of emergency. New York State has taken these measures a step farther by allowing for remote execution of wills, trusts and power of attorneys (POAs) through video conference.

Q. How does the federal tax filing and payment deadline extension affect my estate and gift tax returns?

A. The federal tax filing and payment deadline of July 15, 2020 was expanded to include estate and gift tax returns due on or after April 1 and before July 15, 2020, not just those due on April 15. For fiscal-year taxpayers, estate income tax deadlines are typically determined by date of death and fall on the 15th of a subsequent month. Therefore, deadlines of May 15 and June 15 are now eligible for this relief.

The deadline extension includes 2019 gift tax returns and generation skipping tax returns, estate tax returns and payments, fiscal year returns and payments for fiduciary returns (estates & trusts), and estate tax and interest payments due as a result of a deferral election under Code Section 6166, 6161 or 6163.

Q. What advice would you give to executors and estate administrators during this time?

A. In the current economy, executors and estate administrators should consult with an experienced tax advisor on the use of an alternate valuation date, which allows for assets to be valued 6 months after the date of death instead of on the date of the decedent’s death. For decedents whose date of death was from September 2019 through February 2020, making the alternate value election may result in a significant estate tax savings.

Q. What other lessons can be learned from the COVID-19 impact on trusts & estates?

A. With many probate courts closed due to COVID-19 and estate administration processes stalled, many executors, estate administrators and trustees are left in a very precarious position, unable to distribute decendents’ assets to their family members and loved ones indefinitely.

This environment highlights the importance of creating avenues in your estate plan to provide your beneficiaries with immediate access to needed funds in the event of your death. Even outside of a worldwide pandemic, the probate process takes time, and there are simple ways, such as a transfer on death (TOD) account or revocable trust that would allow your executor or trustee to distribute certain funds immediately to your loved ones upon your passing.

Trust & Estate plans should be customized and regularly evaluated to ensure they are meeting the unique wealth preservation goals of the estate owner.

Lisa Rispoli Lisa Rispoli is the Partner-in-Charge of Trust & Estate Services at Grassi and leader of the firm’s Private Client Services group. She has over 30 years of experience in accounting, estate planning & valuation, as well as gift, estate and trust taxation. Lisa is adept at working with clients and their professional advisors to develop estate plans to transfer family, business and personal wealth... Read full bio