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Six Gifting and Tax Strategies for the Current Environment

Even amid the turmoil, opportunities still exist.

In extraordinary times like these, with depressed market prices, heightened market volatility and falling interest rates, investors can sometimes feel powerless. But the truth is that there are still many things your clients can control in this environment, including opportunities to provide for their families and others that don’t come around very often.

Here are some gifting opportunities to discuss with your clients.

Donate to Support Your Communities

When humanitarian concerns such as the coronavirus appear, it’s always helpful to remember that our tax code provides significant incentives to support charity. In 2020, you can deduct up to 100% of your adjusted gross income for gifts made to a public charity. These deductions can offset your normal earnings, such as salaries and bonuses, as well as dividend and interest payments you receive. They can also offset capital gains from one-time events like the sale of a business.

Help Family Members Ride Out the Storm

If you have cash available, now can be a great time to gift assets to children and grandchildren. Under the gift tax annual exclusion, you can give up to $15,000 in 2020 to each recipient without tax consequences. For a married couple, the total is $30,000 per recipient. While people often wait until the end of the year to make these gifts, there can be several good reasons to make them now.

  • Gifts now can help minimize the effects of current market conditions for future generations by providing your beneficiaries with liquidity so they don’t need to sell securities while market prices are depressed.
  • Certain family members may be under additional stress as business activity stalls and jobs shift.
  • Gifting also can help beneficiaries invest in the market while prices are low.

Provide Long-Term Support by Using Your Exemption Amounts 

In addition to annual exclusion gifts, individuals currently have up to $11.58 million in estate, gift and generation-skipping transfer (GST) tax exemption that they can use to make gifts during their lifetime or at death without paying estate, gift or GST tax. That amount, however, is scheduled to drop in half in 2026. So, if you’ve been thinking about using this higher exemption amount before losing it, now could be the time to pull the trigger, while valuations are under pressure.

Giving away assets that you expect to appreciate as values recover makes use of your exemption while also shifting that appreciation to the next generation.

Use GRATs and CLTs to Make Additional Tax-Free Gifts 

Both grantor retained annuity trusts (GRATs) and charity lead trusts (CLTs) allow you to pass the appreciation in the value of assets over a hurdle rate set by the Internal Revenue Service to your beneficiaries tax-free. With low interest rates and depressed prices, these strategies are strongly favored by current conditions. Currently, the IRS hurdle rate is 1.8%. In April, the rate will drop to 1.2%.  

If you place an asset worth $2 million into a GRAT this month and it appreciates by 5% over the next two years, you can make a tax-free gift of over $100,000 to your beneficiaries. If you do the same gift in April with the same appreciation, the tax-free gift would be over $120,000.   

With a GRAT, you transfer assets into a trust and receive annuity payments back from the trust over the trust term, which is typically two years. Anything that’s left in the trust after the term can go to your beneficiaries without resulting in a taxable gift. CLTs operate in a similar fashion but make annuity payments to charity rather than you.

Refinance Your Debt and Family Loans

This one is simple. With interest rates at rock-bottom levels, it could make sense to refinance existing debt obligations such as your home mortgage and reduce the interest rate on any loans you have made to family members. The minimum interest rates for private loans are called applicable federal rates (AFR), and they’re reset on a monthly basis.  

Convert Your Traditional IRA to a Roth

Finally, with depressed values, it can make sense to convert a traditional individual retirement account into a ROTH IRA.  Since the taxes resulting from a conversion are based on the IRA’s balance at the time of conversion, depressed market prices help reduce the tax liability if you decide a ROTH conversion makes sense for you.  

Because the income tax liability has already been paid with a ROTH, your beneficiaries receive your ROTH assets at your death free of income taxes.  This became a more valuable benefit with the passage of the SECURE Act at the end of 2019. Under the SECURE Act, assets in a traditional IRA generally now need to be distributed to your beneficiaries within 10 years of inheriting the account, which is likely to increase and concentrate a tax burden that previously could have been spread over the lifetime of the beneficiaries. Roth IRAs are subject to the same 10-year distribution requirement, but there’s no income tax liability to accompany the earlier distribution schedule.

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