The Perfect Storm for Advanced Estate Planning (Part 1)

Now is the time to undertake advanced estate planning! The last time we made a call-to-action with this level of conviction to undertake more advanced estate planning was in late 2011 when interest rates began hitting historical lows. Well, we are hitting historically low interest rates again, and the interest rates for June 2020 are simply astounding!

Why is this particular time so historically significant from an advanced estate planning perspective?

A. Historically low interest rates

The government interest rates we are normally required to use for estate planning purposes are referred to as the Applicable Federal Rates (AFR rates). The AFR rates are updated monthly and are split into short-term rates (terms up to 3 years), mid-term rates (for terms over 3 years, but not more than 9 years), and long-term rates (for terms over 9 years). In addition, we are required to use the IRC Section 7520 rate (7520 rate) for certain statutorily approved transactions, such as Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs).  The 7520 rate is 120% of the mid-term AFR rate.

For comparison purposes, these various interest rates plummeted in late 2011 and hit historical lows in November 2012 with the 7520 rate at 1% and the AFR rates at 0.22% (short-term AFR), 0.89% (mid-term AFR), and 2.4% (long-term AFR). These rates will now hit new historical lows in June 2020 with the 7520 rate at 0.6% and the AFR rates at 0.18% (short-term AFR), 0.43% (mid-term AFR), and 1.01% (long-term AFR).

Let me repeat this for emphasis. The 7520 rate for June 2020 is 0.6%, and the long-term AFR rate for June 2020 is 1.01%! WOW!!

Why is this important? Many laws surrounding estate planning transactions assume that real life economics will normally follow the proper AFR rate or 7520 rate, which are essentially based on U.S. government bond rates. The applicable AFR or 7520 rate is often referred to as the “hurdle rate.” Where there is a disconnect, as we likely have now, estate planners can take advantage of this disconnect. The question is if you believe you can earn more than this applicable hurdle rate over the term of the transaction, and by the way, you get to determine the term of the transaction? Put another way, if you do not think you can beat a rate of return of 0.6% or 1.01%, you need a new investment advisor!

B. Relatively low asset valuations

Because of the Covid-19 pandemic and the resulting shutdown of significant parts of our economy, asset values initially plummeted, remain below their prior highs, and continue to be extremely volatile. As a result, valuations for estate planning purposes will likely be depressed.

Why is this important? While having your net worth plummet temporarily does not feel good, it is actually excellent from an advanced estate planning perspective if you still believe that the valuations will come back within a short to mid-term time period. Even if you do not believe that your current assets have excellent prospects, you can often use them to purchase alternative assets that will have a better outlook. The goal is to move assets at a relatively low value for gift tax purposes and then have the value increase or explode sometime after being moved.

C. Expectation of higher taxation on the horizon

Taxation is likely going higher within the next few years after the worst part of this pandemic subsides. Massive pressure will be on Congress to eventually raise taxes because of the huge increase in government debt being created to get us through this unprecedented, and hopefully temporary, shutdown of our economy, as well as for funding various political promises with regard to health care or otherwise. This means income tax rates will likely be going up over time. This also means that the temporary 2017 Tax Act increase in the wealth transfer (gift, estate and GST) tax exemption amounts from $5 million each (indexed for inflation) to $10 million each (indexed for inflation) will likely either revert as scheduled back to $5 million each (indexed for inflation) beginning on January 1, 2026, or it may drop even further to the 2009 figure of $3.5 million each (with or without indexing for inflation). Because of the likely massive pressure to increase tax revenues, this reduction in the wealth transfer tax exemptions may even happen before 2026. The good news is that portability is likely safe, so a married couple should still be able to use both spouses’ exemption amounts as long as they timely file an IRS Form 706, Estate Tax Return, after the first spouse’s death.

Why is this important? From an income tax perspective, planning that may cause an income tax liability may be better to do now versus waiting until a future year. From a wealth transfer tax perspective, waiting to act may end up being a very expensive decision.

In our next newsletter, we will discuss who should do more advanced planning, to what extent and the most common planning options. We also plan to have a webinar on this topic in June 2020. In the meantime, if you would like to consider taking advantage of this incredible window of opportunity, please call us at (678) 720-0750 or e-mail us at to schedule an estate planning consultation. We can discuss your situation, answer your questions and determine what might be the best fit for you. We look forward to meeting with you.

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