Mid-Pandemic Planning for High Net Worth Individuals

| 5/5/2020
Mid-Pandemic Planning for High Net Worth Individuals

COVID-19 has provided an unusual opportunity for estate and gift planning for high net worth individuals, their families, and their businesses. Three current conditions make now the perfect time for families to review their estate plans.

The first condition is historically low interest rates, which make more powerful several estate planning techniques. Interest rates affect how wealth transfers are valued. The lower the interest rate, the larger the potential of a tax-free transfer or gift. As a result, gift and estate tax planning using certain types of trusts, such as grantor retained annuity trusts, intentionally defective irrevocable trusts, qualified personal residence trusts, and charitable lead trusts, now are extremely powerful and attractive planning techniques.

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The second condition is business valuations that likely are lower right now because companies have lower cash flow projections and because of lower valuation multiples and larger valuation discounts. These lower values for transfer tax purposes mean that the donor will use less of his or her applicable exclusion (which is currently $11,580,000). Combined, these circumstances can have a staggering compounding effect that results in substantially lower values for many businesses, making now the perfect time to transfer ownership of a family’s closely held business (and other assets) to the next generation.

The third condition is the result of changes under the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA generally removed the ability to provide for post-death stretch distributions from individual retirement accounts (IRAs) or 401(k)s. Prior to the TCJA, asset distributions from certain types of retirement plans, like an IRA or a 401(k), could be delayed well beyond 10 years after the account owner’s death. Now, most beneficiaries are required to withdraw all plan assets within 10 years of the participant’s death. Taxpayers who have an IRA or a 401(k) and who have not updated their estate plan to account for this law change should consider doing so now. Also, under the TCJA, the gift and estate tax exemption is scheduled to be reduced in 2026, and proposals exist to reduce the exemption even sooner. Acting now can lock in the higher exemption.

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Sarah Allen-Anthony
Sarah Allen-Anthony
Partner, Global Private Client Services Leader
Sally E. Day
Sally Day
Managing Director