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COVID-19 and Estate Tax Planning 

November 16, 2020

The pandemic has underscored the necessity of having a plan in place in the event of untimely death, in an effort to minimize taxes and maximize the value of one’s estate. While the coronavirus’ impact is far-reaching and ongoing, individuals should consider revising their estate tax planning based on the following:

Interest Rate Plunges:

To combat the significant pandemic strains on the economy, the central bank cut rates to insulate the economy against coronavirus fallout. The Federal Reserve is prepared to support the flow of credit to households and businesses. In its November monetary policy statement, the central bank stated, “The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” For the months to come, the Fed committed to more asset purchases at least at the current pace of $80 billion Treasury securities and $40 billion agency mortgage-backed securities per month. With exceptionally low-interest rates, legal instruments like Intentionally Defective Grantor Trusts (IDGTs) and Grantor Retained Annuity Trusts (GRATs) can be used to lowering one’s taxable estate.

In an IDGT, the grantor sells an asset to the trust in exchange for a payment of above-market return. Paying above market will be less of a burden now as the interest rate is near to zero. The grantor pays income taxes during their lifetime, but the underlying assets in the trust are allowed to grow, tax-free, passing to the person’s estate without such growth impacting the taxable amount.

Stock Market:

Given the fluctuations of the stock market throughout the pandemic, and now as we contemplate a new presidential administration, individuals should assess whether their estate plan reflects their current intentions. Is now an appropriate time to transfer reduced value assets to a loved one? If yes, you might receive a tax exemption for gifts.

Estate tax Threshold:

The Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption to $11.18 million for singles and $22.36 million for married couples, but only for 2018 through 2025. The exemption level is indexed for inflation reaching $11.4 million in 2019 and $11.58 million in 2020 (and twice those amounts for married couples).

Call Tiveron Law’s Estates Department at 716-636-7600 if you have any questions about the information discussed here or with any other questions you may have.