Connections for Success



Current Conditions are Favorable for Cost-Effective Wealth Transfers
Eileen Cozzi

The ongoing novel coronavirus (COVID-19) pandemic has taken a terrible toll on the economy. But the current low-interest-rate environment, coupled with depressed asset values, means that now may be a good time to transfer wealth to your children and grandchildren.

Consider making gifts

For 2020, the federal gift and estate tax exemption is an inflation-adjusted $11.58 million ($23.16 million for married couples), the highest it has ever been. The exemption is scheduled to drop to its pre-2018 level of $5 million (indexed for inflation) on January 1, 2026.

This window of opportunity could close sooner, depending on the results of the November election. If you have a large estate, it is a good time to consider making substantial gifts to your loved ones as a hedge against future reductions to the exemption amount. The gifts must be greater than the reduced exemption in order to benefit from the current exemption. For example, under the current law, if $3 million of your exemption is used to make gifts prior to the exemption reduction, your remaining exemption on January 1, 2026, will be $5 million (indexed for inflation) less $3 million. If $11 million of your exemption is used to make gifts prior to the exemption reduction, then your remaining exemption on January 1, 2026 will be zero.

Gifting is a particularly good strategy during an economic downturn because the values of many assets, such as stocks and real estate, are temporarily depressed. In addition, low-interest rates make certain estate planning techniques, such as grantor retained annuity trusts (GRATs), even more powerful.

Why GRATs are great now

A GRAT is an irrevocable trust that pays you an annuity during the trust term and then distributes any remaining assets to your children or other beneficiaries. Your contributions to the trust are treated as taxable gifts to your beneficiaries, but the value of the gift is limited to the present value of the remainder interest.

To calculate the gift tax value, the present value of the annuity payments is subtracted from the value of the assets you contribute to the GRAT. Present value is based on a conservative, assumed rate of return commonly known as the Section 7520 rate. At the time of this writing, that rate, which is published monthly by the IRS, was under 1%.

If you set the annuity payments high enough or the trust term long enough, you can minimize the value of the gift for gift tax purposes or even reduce it to zero. And so long as the trust assets outperform the Section 7520 rate (and you survive the trust term), your beneficiaries will receive a substantial amount of wealth at the end of the term, free of gift and estate taxes.

GRATs are an attractive option when interest rates are low because it is easier to outperform the Section 7520 rate, maximizing the amount of wealth you can transfer tax-free. And, if you fund a GRAT with assets whose values are depressed and are expected to appreciate significantly in the future, the benefits a GRAT provides are that much greater.

For example, in June 2020, when the Section 7520 rate is .6%, X transfers $1 million to a GRAT that will pay X an annuity for two years, then terminate and distribute the remaining assets in the GRAT to X’s children. In order to reduce the value of the gift of the remainder interest to zero, the annual annuity to X will be $504,515.40 each year. If the assets in the GRAT appreciate at a rate of 10% per year, there will be approximately $150,000 of assets remaining in the GRAT at the end of the term to distribute to X’s children, free of gift and estate taxes.

Prioritize what is important

During times like these, your family’s health is your first priority. But it is equally important to take into account their financial security. This means taking advantage of current low-interest rates and depressed asset values to cost-effectively transfer wealth. Contact your estate planning advisor for additional details on the best strategies to transfer wealth to your heirs during this difficult time.

For more information contact Eileen Cozzi at [email protected] or 312.670.7444. Visit to learn more about our Wealth Management Group.

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