Embed Size (px)
Citation preview
Estate Planning Opportunities in Turbulent Times Low Interest Rates + High Exemptions + Low Values
2
Jennifer SavageSSSB LawPartner216.696.4200
Leon LaBrecque JD, CPA, CFP®, CFASequoia Financial GroupChief Growth Officer248.918.5905
Heather Welsh CFP® AEP®, MSFSSequoia Financial GroupVice President, Wealth Planning330.255.2124
Panelists
Scott SwainCPA, CFA, CFP®
Cohen & CompanyPartner216.774.1262
Why is this Important?
Rates used for:• Computing gift values for wealth
transfer techniques• Minimum rates on intra-family loans
Transfer assets while values are down Estate tax reverts to old levels at the end
of 2025 (if not sooner)• COVID-19 stimulus deficit makes
estate tax increase low-hanging fruit
Unprecedented Interest Rate Opportunity
IRS interest rates at an all-time low for May 2020
• §7520 rate: 0.80% (June 0.6%)• Applicable Federal Rates (AFRs)
• Short-term (<3 years): 0.25%• (June 0.18%)
• Mid-term (3-9 years): 0.58%• (June 0.43%)
• Long-term (10+ years): 1.15%• (June 1.01%)
§7520 rate comparison• January 2019: 3.4%• March 2000: 8.2%
Chart populated with data taken from IRS.gov
Intra-Family Loans
Intra-family loans vs. traditional lenders• Lower rate• No underwriting
Help family without giving away money Refinancing considerations
Intra-Family Loans - Example
Granddaughter buying a house $500,000 mortgage for 15 years Bank offering
• 2.875%• Monthly payment $3,423
Intra-family loan from Grandma• 1.15%• Monthly payment $3,026
Savings to Granddaughter of over $71,500
Give It Away
Business values are down Gifting ownership is a simple approach
• Outright• Irrevocable trust
Valuation & gift tax return filing required Carryover basis
Installment Sales
UNEMPLOYMET
Full purchase price financed by seller at the low AFR
Buyers use business cash flow to fund note payments
Income stream to seller from note repayment
Buyers have basis equal to purchase price Taxable gain to seller
• Minimized with lower valuations• Spread out over the term of the sale
Installment Sales & Intentionally Defective Grantor Trust (IDGTs)
UNEMPLOYMET
Seed gift uses basic exclusion amount
• Lower valuation reduces this impact
Remaining interest financed by seller with note at the AFR
Eliminates taxable gain to seller Carryover basis for buyers Grantor pays tax on trust income Efficient GSTT planning vehicle
IDGT Example
$13.3M FMV of asset pre-COVID-19 $10M FMV of asset post-virus (25%
drop) 20% valuation discount (15-35% range)
$8M discounted value Assume annual cash flow = $1,900,000
after return to normal (7 X multiple)
$800,000 seed gift to trust $7.2M sale to trust via 9-year note Mid-term AFR 0.58% $823,379 annual P&I payments
• Total interest $210,410• Could instead use interest-only with a
balloon payment Net effect is transfer of $13.3M of stock
while using only $800,000 of exemption Est trust assets at payoff = $23,100,000
Defined Value Transfers
Limits gift or transfer to a defined value rather than a stated number of shares
Units initially transferred based on an independent valuation
If challenged by IRS, units ultimately transferred adjusted to match defined value
Grantor Retained Annuity Trusts (GRATs)
Transfer assets in exchange for an annuity Annuity calculated at the §7520 rate Excess appreciation goes to beneficiaries Minimum term of two years “Zeroed-out” design can eliminate
exemption usage Carryover basis GSTT exemption not allocable until end of
trust term
Married couple $25M net worth (down from $30M) Real estate, investment assets, &
family business Business has 5% growth & 5%
distributed income each year Transfers $10M of the business to a
GRAT 20% discount ($8M discounted value)
0.8% §7520 rate• $835,622 (~10.45%) annual annuity for
10 years• $2 PV remainder interest gift• $11,638,710 to heirs at the end of 10
years Compare at 3% §7520 rate…
• $871,974 PV remainder interest gift
GRAT Example
13
Annual payments to charity with annuity based on the §7520 rate
Excess appreciation to heirs at the end of the trust term
Charitable beneficiary options• Restrictions on family foundations
Non-Grantor vs. Grantor (Reversionary vs. Non-Reversionary)
Charitable Lead Annuity Trusts (CLATs)
CLAT Example Transfer $1M to 20-year CLAT 5.431% ($54,310) payout to
charities for 20 years 0.8% §7520 rate $1,000,000 PV of charitable
benefit $0 PV remainder interest gift Compared to $192,200 taxable gift
at 3% 7520 rate If 6% total after-tax return,
$1,209,309 transferred tax free in year 20 with .8% rate
More aggressive variable annuity payments
If $10 annuity in year 1, increasing at 75% each year until $441,455 in year 20, $0 taxable gift, and $1,841,849 transferred tax free in year 20 with assumed 6% after tax return
If $10,000 annuity for 19 years and $996,800 in year 20, $0 taxable gift, and $1,882,476 transferred tax free under same assumptions
Comparison of Transfer StrategiesOutright Gift IDGT GRAT CLAT
Gift Yes, for full value of transfer Yes, for seed funds Yes, of PV, except ‘zeroed-out’ GRATs
Yes, for non-reversionary CLATs that are not ‘zeroed-out’
Tax TreatmentFuture income/sale proceeds taxed to beneficiary
Grantor trust Grantor trust Grantor or Non-grantor trust
‘Freeze’ Asset Value Yes Yes, when note is paid Yes, once principal is paid and grantor survives Yes
Mortality Risk No Yes, until note is repaid Yes Yes, for grantor CLATs
GST Exemption Yes Yes No Yes, subject to the adjusted GST exemption amount
Carryover Basis Yes Yes Yes Yes
Gift Tax Issues
Yes, file 709 if value exceeds annual exclusion or gift is asset other than cash/publicly traded securities
Yes, file 709 for seed funds
Yes, file 709; recommended even if ‘zeroed-out’
Yes, file 709 for non-reversionary remainder interest
Valuation Rate Fair market value AFR (May 2020: mid-term 0.58%; long-term 1.15%)
§7520 rate (May 2020: 0.8%)
§7520 rate (May 2020: 0.8%)
Panelists
17
FOR MORE INFORMATION VISIT:
COVID-19: PODCAST:
TALK TO AN ADVISOR:
sequoia-financial.com/COVID-19-RESOURCESsequoia-financial.com/PODCASTSsequoia-financial.com/TALK
Jennifer SavageSSSB LawPartner216.696.4200
Leon LaBrecque JD, CPA, CFP®, CFASequoia Financial GroupChief Growth Officer248.918.5905
Heather Welsh CFP® AEP®, MSFSSequoia Financial GroupVice President, Wealth Planning330.255.2124
Scott SwainCPA, CFA, CFP®
Cohen & CompanyPartner216.774.1262
18
Next Steps
If your client is worried about current or future estate tax liability, this is an optimal time for wealth transfer opportunities.
If the recent downturn didn’t adversely affect your client’s wealth position, there is potential planning to be done.
If your client wants to transfer assets without giving assets away, consider intrafamily loans.
If your client is looking to transfer assets to the next generation & preserve their unified credit, consider GRATs or IDGTs depending on GSTT implications.
If your client is charitably inclined & wants to facilitate a transfer with very low gift tax consequences, consider a CLAT.
This material is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. This material does not constitute tax, legal, investment or any other type of professional advice. You should consult with a qualified tax, legal or financial advisor prior to making a decision. Certain assumptions may have been made by these sources in compiling such information, and changes in such assumptions may have material impact on the information presented herein. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific financial situations and investment objectives. Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation, and may not be updated or otherwise revised to reflect information that subsequently becomes available, or changes occurring after the date hereof. These materials do not take into account your specific circumstances and we do not represent that this material is complete or applicable to your situation.
The information provided is hypothetical in nature, does not reflect actual investment results, and is not a guarantee of future results. No reliance should be placed on any such information when making an investment decision. Nothing herein is intended as an endorsement by any person of Sequoia nor should the information be construed as a statement of a typical client’s experience with Sequoia. Sequoia Financial Group, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials. While we have taken great care in the preparation of these materials, we cannot be responsible for clerical, computational, or other errors. Some photos by Unknown Author and are licensed under CC BY
Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment adviser does not imply a certain level of skill or training.
©2020, Sequoia Financial Group, all rights reserved.
Disclosures
3500 Embassy Pkwy | Suite 100 | Akron, OH 44333888.225.3777
sequoia-financial.com
