COVID-19 Gift Tax Opportunities

by Augusto Egoavil
April 1, 2020

The COVID crisis is generating tax planning opportunities as a result of lower interest rates and the capital losses accruing in assets and other property.

IRS interest rates that apply to Grantor Retained Annuity Trusts (“GRATs”) and loans will be close to historic lows starting April 1, 2020. The hurdle rate that applies to GRATs created in April will be only 1.2%, and the interest rate that applies to three to nine-year loans made in April by clients to individuals or trusts will be only .99%. These rates may decline still further in May.

Given these low rates and declines in asset values, now may be an appropriate time to consider some tax planning opportunities.

Gifts

Gift an undervalued asset, such as stock or real estate, to children and more remote descendants. You can transfer all of the future appreciation on the gifted asset free from transfer tax. You can leverage the use of your annual exclusion and your lifetime exclusion for purposes of gift tax and/or pay less gift tax.

Trusts

Use trusts to hold assets for the benefit of your children or more remote descendants. A trust provides creditor protection, allows for asset management and control, preserves tax benefits and, if structured as a “grantor trust,” allows you to make what effectively amounts to tax free gifts to the trust beneficiaries by your being responsible for paying the income tax attributable to trust assets.

GRATS

You may also wish to consider refinancing existing intra-family debt at lower rates. Select an undervalued asset, preferably one that has a high potential for appreciation, and contribute it to a newly formed grantor retained annuity trust (a GRAT) or sell it to a grantor trust in exchange for a promissory note.

Loans

Make loans to family members and to grantor trusts. You can restructure existing family loans to take advantage of lower interest rates, so that family members and trusts benefit more from those loans. In the case of loans to trusts, as long as the asset in the trust outperforms the interest rate on the note, value passes to the trust without any transfer tax consequence.

Using any of these alternatives, the transfers are structured so there is little to no gift tax consequences. The fair market value of the asset on the transfer date, plus an assumed rate of return (in the case of a GRAT) or a fixed interest rate (in the case of a sale), is returned to you over time, either in the form of annuity payments or note repayments. To the extent the transferred asset outperforms that rate, value passes to the trust with no transfer tax consequence.