The current economic situation is a once-in-a-lifetime opportunity for many wealthy taxpayers to reduce the size of their taxable estates using simple techniques, practitioners say.
“Probably the best thing you can do from an estate tax standpoint for people who are estate-taxable is to set up an irrevocable trust, and then to sell assets or part ownership in an entity to the irrevocable trust in exchange for a low-interest note,” Alan S. Gassman of Gassman, Crotty & Denicolo PA said on an April 3 webinar hosted by Leimberg Information Services Inc.
Interest rates and asset values, particularly for stocks, are at historic lows, but many observers expect that the economy will rebound fairly quickly once the coronavirus crisis passes, according to Gassman. That makes now the ideal time for wealthy clients to begin doing installment sales or to do more of them, he said.
One possibility is to revisit existing intrafamily arrangements. As an example, Gassman said that if he owes his mother $10 million with a long-term note bearing interest at 2.4 percent, he could reduce that to the new 1.44 percent long-term rate for April.
“In our opinion, that’s not considered to be a gift; it’s simply a renegotiation,” Gassman said. And even if it turns out to be deemed a gift, the taxes saved from the lower interest rate should outweigh the “pain of losing part of your [gift tax] exemption,” he added.
It’s not just assets like stocks that can benefit from this strategy — nonmarketable securities present a major opportunity as well, according to Gassman.
Gassman said that with so few comparable sales now taking place, an appraiser told him he would offer discounts of 8 to 10 percent on real estate. “So your million-dollar building, if you transfer it during this crisis, is going to be worth somewhere between $880,000 and $900,000. And when the crisis thaws, it might go right back up to a million or somewhat less,” he said.
So while marketable securities have already been discounted by the markets, nonmarketable securities and operating companies are at a standstill, which makes this a “really great opportunity to do the transfer,” Gassman said.
A Word of Caution
Wealthy taxpayers who feel inclined to help victims of the coronavirus will want to be mindful about how they give.
Private foundations and public charities will have a “huge impact” in helping deal with the pandemic, and managers of foundations may be tempted to support particular individuals who they know have been affected by the virus, said John N. Beck, also of Gassman, Crotty & Denicolo.
“I would advise caution on this,” Beck said. Generally, private foundations need to obtain approval from the IRS in advance and keep stringent records in order to contribute to an individual. And there are many rules and regulations related to private benefit to be aware of, he said.
“So if you're helping somebody and that person is related to you, you could have an issue with your private foundation,” Beck said. In most cases, the easiest way to help victims of the virus will be through a public charity, he added.
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