The Corona Virus is causing major economic impacts as can be seen with the declining stock market. This adverse impact and the uncertain prospects for the future is a source of concern and worry for us all. However, the hopeful temporary reductions in value, low interest rates, and an $11,500,000 gift tax exemption create a unique opportunity to minimize or avoid estate tax. Lower values mean that we can transfer assets out of your estate and use less of the exclusion due to the hopefully temporary reduction in value.
The current lifetime estate and gift exemption is $11,580,000. Under current law, that exemption drops to under $6,000,000 on January 1, 2026. If there is a change in the administration due to the election in November, the exemption would almost certainly be reduced. In 2016, many commentators noted the Obama administration’s desire to reduce the exemption to $3,500,000. More importantly, legislative changes were recommended to preclude the use of many of the tools that we traditionally use to reduce estate tax.
All of these factors create a unique planning opportunity to minimize or avoid estate tax. Interest rates are at historic lows. The applicable federal rate (“AFR”) for short term loans (up to 3 years is only 0.91%, for midterm loans (up to 9 years) is only 0.99% and for long term loan is only 1.43% for loans more than 9 years).
A low interest environment rate makes certain estate play techniques more effective. Grantor Retained to Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs) may be great tools for wealthy Americans seeking to reduce their taxable estates. GRATs and IDGTs are just two (2) of the many tools available. The ability to use these tools to minimize estate tax may be lost if the political climate changes with the elections in November. This may very well be the best, last chance opportunity to minimize or avoid estate tax.