For wealthier families and individuals, now may be an incredible time to act to legally reduce and possibly fully avoid future wealth transfer taxes, including gift, estate, and generation skipping transfer (GST) taxes!
Why now? Two reasons.
1. Depressed (and volatile) asset values.
Asset values, including most notably publicly traded securities, are clearly much lower (and volatile) since President Trump began pushing his tariff agenda. How is this beneficial? Let’s say you have marketable securities that were valued at approximately $10 million earlier this year, but are now worth $7.5 million. If you give the $7.5 million now to a Family Gifting Trust with your loved ones as its beneficiaries (also sometimes called a Spousal Lifetime Access Trust or SLAT) of some type (possibly retaining indirect access), then all the income and appreciation that occurs after the gift, including the $2.5 million appreciation just to get you back to where the securities were worth earlier this year, is now out of your taxable estate without any wealth transfer taxes (gift, estate, or GST taxes) and without using any of your related tax exemption amounts. Since these wealth transfer taxes are currently at an effectively flat rate of 40% (above the Exemption amounts), you can avoid future wealth transfer taxes of $1 million ($2.5 million x 40%). You can add to this initial savings 40% of all additional future income and appreciation earned by the gifted assets inside the Family Gifting Trust. And, by personally paying the income taxes on any taxable income earned by the assets in the Gifting Trust after the gift, you will effectively be able to make continuing wealth-transfer-tax-free gifts to the trust each year.
The bottom line is that you will be supercharging your gifts for tax purposes if you can take advantage of these currently depressed (and volatile) asset values!
2. Current interest rates. While the government’s interest rates for tax purposes, known as the Applicable Federal Rates (AFRs) and the Section 7520 rate, are currently in the 4% to 5% range, which are well above what they were only a few years ago, the reality is that they are still fairly low by historical standards.
These interest rates open up other types of wealth transfer tax reduction strategies. For example, you can use transactions to essentially freeze the currently depressed (and volatile) asset values for wealth transfer tax purposes, subject to a slow leak of the applicable interest rate (the AFR or 7520 rate). These specific strategies commonly include transactions such as a related party sale to a grantor trust mostly in return for a promissory note (using the same type of Family Gifting Trust discussed above) or a gift to a Grantor Retained Annuity Trust (GRAT). Sales to grantor trusts and gifts to GRATs are both “plain vanilla” kinds of wealth transfer tax savings strategies, and those who are willing to take on more risk may wish to consider other, more creative strategies instead of or in addition to those plain vanilla ones.
If President Trump is using the tariffs as a negotiation strategy, then asset values may rebound in the short to midterm future. In that case, the opportunity to make wealth-transfer-tax planning moves using low values may be limited to a narrow time window. For this reason, if you think you want to consider these moves, you should act soon.
If you are interested in this type of tax planning or you just want to make sure your estate plan is up to date and in order, please call our offices at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule an estate planning consultation to discuss your particular situation.
