In Focus Resource Center > Insights

A Call to Action: Are You Using Your Time to Get Your Affairs in Order?

By Howard Klein .


The current global pandemic has had an impact on every one of us in one form or another. The short-term focus has naturally been on health and safety along with immediate financial issues. Have I lost my job either permanently or temporarily? Is my business closed or struggling? Do I have the resources I will need to get through the crisis? While it is a natural reaction to address the most urgent matters, it is also a time to consider how this crisis should be a call to action to get your personal, legal, and financial affairs in order. It is a critical time to address your estate plan and it is of vital importance to FOCUS ON WHAT COUNTS to ensure that your plan reflects your wishes and goals for you and your family.

The items below may be prudent first steps to consider.

Estate Tax Planning – THE BASICS

The first question we ask when discussing estate planning is if there is an estate plan in place. If a client does not have an estate plan, then consideration should be given to addressing this immediately. Not having a plan could leave one’s affairs in disarray and require additional, costly professional assistance. Dying without a will leaves the decedent with no control as to who inherits his or her assets, as the applicable state’s intestacy laws will then control the disposition of the estate. In addition, without a will, the appointment of guardians for minor children and a personal representative to administer the estate will be in the hands of a probate court. Furthermore, the lack of a plan could lead to potential disputes and possibly litigation.

If an estate plan is in place, when was the last time it was reviewed? This would include all wills, trusts (of any kind), powers of attorney, and health care proxies.

Does your estate plan successfully address all of the personal, legal, and financial considerations given your current health – both physically and financially? Also, does it reflect the current physical and financial health of your heirs?

Does your family know where your documents (and passwords where needed) are located?

Are your beneficiary designations on your life insurance policies and retirement accounts up to date?

Have you designated someone to act on your behalf, in the event you become incapacitated?

Do all of your children who are 18 years or older have health care proxies and power of attorney documents in place?

An Additional Word on Living Wills and Health Care Proxies –

As part of the review of your overall estate plan, important components that you can address relatively quickly with your estate planning attorney, if necessary, are your living wills and healthcare proxies (sometimes it is a combined document). Many such standard documents contain an absolute prohibition on intubation, which people presumably would not have intended in the current environment for treating coronavirus. If this is the case, the document can be revised to contain more reasonable prohibitions on intubations, given the current circumstances.

Gift Tax Planning – An Ideal Time to Take Advantage of Opportunities

While it is always important to have an estate plan in place, the current environment creates a unique opportunity for discussion in considering sophisticated estate planning for the following reasons:

  1. Interest rates are at historic lows.
  2. 2. The crisis has dramatically affected valuations of investments and closely-held businesses.
  3. The current $ 11.58M federal estate and generation skipping exemption is scheduled (after December 31, 2025 or earlier with legislation) to be reduced to substantially lower amounts.

Therefore, it is imperative to consider the immediate opportunity to move highly-appreciated assets out of your estate at lower values, thereby reducing the amount of lifetime estate and gift tax exemption used.

If a client believes the economic downturn is temporary, gifting should be considered as soon as possible. Those who wait until the end of the year to make annual exclusion gifts of shares of stock may be doing so at a higher value, resulting in less value passing to the intended recipient.

The opportunity to gift interests in the family business to the next generation can be extremely attractive with lower valuations and interest rates. These gifts can pass wealth to the next generation and utilize valuation discounts to reduce the value of the gift for gift tax purposes. This gifting plan also offers a pathway to discounting the value of the remaining shares in the hands of the older generation, which could lower the estate tax impact upon death.

The following can potentially be effective tools to be considered in planning, depending on the client’s particular circumstances:

Grantor Retained Annuity Trusts

  • A grantor retained annuity trust (“GRAT”) may offer an opportunity to pass wealth to a beneficiary at the end of the GRAT term without the imposition of a gift tax or the use of the grantor’s annual exclusion or lifetime exemption. GRATs are most effective for easily valued assets with appreciation potential. The low interest rate environment and potential for increased appreciation in securities and other assets make this technique attractive.
  • A GRAT is created when an individual (the grantor) transfers assets into an irrevocable trust that will pay the grantor an annuity for a specified period, with the remainder passing to non-charitable beneficiaries – typically the grantor's children. The value of the gift is actuarially determined by subtracting the value of the grantor's retained interest (i.e., the present value of the annuity payments to the grantor) from the fair market value of the property transferred into the trust. The valuation is computed by reference to an interest rate set monthly by the IRS (called the Section 7520 Rate). The IRS assumes that the trust assets will generate a return at least equal to the applicable Sec. 7520 rate in effect for the month the assets were transferred to the trust. All income and appreciation in excess of that required to pay the annuity accumulate for the benefit of the remainder beneficiaries free of gift tax.
  • Under one type of GRAT structure, the remainder interest can be valued at or near zero (referred to as a “zeroed out GRAT”) and the transfer would thereby use little or no estate and gift tax exemption amount. 

Charitable Trusts

  • If charitably inclined, a charitable lead annuity trust (CLAT) may be favored over other kinds of “split interest” trusts (trusts that benefit both charitable and non-charitable beneficiaries) in this current low interest rate environment. Historically low interest rates combined with depressed asset values offer an opportunity to benefit charitable and non-charitable beneficiaries.
  • A CLAT is a type of split-interest charitable trust that provides for an annuity payment to a charity for a period of years, with the remainder being gifted to children or another designated beneficiary. The value of the gift at the termination of the CLAT is determined by valuing the remainder interest on the date of the gift, and such remainder is valued by reference to the IRS Section 7520 interest rate. Accordingly, if the CLAT's investment performance over the term exceeds the Section 7520 Rate, the client will be gifting such excess to his or her designated beneficiary free of gift tax.

Sale of Business Interest to Intentionally Defective Grantor Trust (IDGT)

  • A business owner could create a grantor trust and then sell (with no tax consequences on the sale) an interest in a business to the next generation in exchange for a promissory note, with the trust using the distributions from the business to pay non-taxable interest and principal payments to the grantor to pay off the debt.
  • Under certain circumstances, the income taxes due on the income from the business entity could be paid by the grantor effectively creating an additional tax-free gift to the beneficiaries of the trust.
  • If an IDGT is currently part of an estate plan, swapping out high basis assets outside of the trust for lower basis assets inside the trust is an effective tool to pass on assets outside of the trust with a stepped up basis, which eliminates capital gains tax on the sale of these assets post death.

Intra-family Loans

  • In most circumstances, the Internal Revenue Code requires that loans charge some minimum amount of interest. Loans with a stated interest rate in excess of the Applicable Federal Rate (AFR) carry no gift tax consequences to the parties. A loan to a relative may give that person access to funds at rates and amounts that they would not otherwise qualify for or receive timely from a bank.
  • Intra-family loans might also help offset the pain of “paper” losses and support relatives who might otherwise have to sell prematurely.
  • For intra-family loans that are currently in place, consider refinancing them.

Retirement Planning

  • Conversion from a Traditional IRA to a Roth IRA

If an individual is in a lower tax bracket because his or her income is down substantially, he or she may want to consider converting a Traditional IRA to a Roth IRA. The amount the individual chooses to convert will be taxable as ordinary income, but perhaps at rates lower than the owner may see again. The current tax cost of recognition may be offset by the potential for tax-free growth within the Roth IRA as future distributions are not taxed.

  • Suspension of Required Minimum Distributions for 2020

Under the CARES Act, Required Minimum Distributions (RMDs) are suspended for 2020. For distributions that have already occurred, it may be possible to roll them back, if it has been less than 60 days since the distribution.

Under the Secure Act enacted at the end of 2019, the age requirement for RMD’s was pushed back from April 1st of the year after an individual reaches age 70 ½ to instead April 1st of the year after an individual reaches age 72. This change applies to individuals who turn 70-1/2 after January 1, 2020. Accordingly, under the new rules, if an individual turned 70 on or after July 1, 2019, he or she does not have to take an RMD for 2019, but instead, must take the first RMD for 2021 (the year the individual turns 72) by April 1, 2022.

There are also new provisions under the Secure Act relating to non-spousal beneficiaries of qualified retirement plan assets that should be addressed when considering one’s estate and income tax plan.

We encourage you to reach out to your Citrin Cooperman advisor or contact Partner & Trust and Estate Practice Leader Howard Klein at or 914-949-2990 x-3370.

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