Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, June 9, 2020

The Estate Planning "Perfect Storm"

12010558-3x2-700x467Nationally-known estate planning attorney Steven Oshins and nationally-known CPA Bob Keebler recently gave a joint teleconference entitled "Estate Planning Techniques in a Time of Low Interest Rates"

In the presentation, Steve and Bob coined the term "Perfect Storm" to reflect the current estate planning environment. Steve (SO) was interviewed by the Ultimate Estate Planner (UEP) after the teleconference and the transcript of that conversation is highlighted below:

UEP: Why did you and Bob call the current estate planning environment the “PERFECT STORM”?

SO: We did so for two reasons. First of all, the federal interest rates just hit an all-time record low which makes the advanced estate tax planning techniques work better than ever. Secondly, many asset values are low because of the Coronavirus issues. This includes brokerage portfolios, real estate and businesses in many industries. The lower the value, the less gift tax exemption needed for transfers.

UEP: Let’s spend some time on the details of the advanced estate tax planning techniques. Where would you like to start?

SO: Let’s start with the primary technique used to transfer wealth which is the installment sale to an income tax defective dynasty trust.

UEP: Okay. Please first describe the technique so our readers know how it works.

SO: Sure. The client sets up an irrevocable trust that is drafted to continue for multiple generations with no estate taxes. The trust is designed as a grantor trust for income tax purposes which means that the client pays the income taxes on income earned by the trust. Because the client and the trust are the same person for income tax purposes, sales to the trust are disregarded for income tax purposes. The client makes a gift into the trust and then sells a minority interest or non-voting interest in a business entity to the trust in exchange for a promissory note or other deferred payment. Because of the minority or non-voting interest, the business interest is subject to a valuation discount which therefore enables the client to transfer more wealth to the trust at a lower value.

UEP: The alternative estate planning technique is a Grantor Retained Annuity Trust, otherwise known as a GRAT. Please tell us how the lower interest rates affect GRATs.

SO: A GRAT is an irrevocable trust into which the client makes a gift and retains a stream of annuity payments for a term of years. The client generally funds the GRAT with a minority or non-voting interest. Because the annuity payments are computed based on a formula that assumes a rate of return based on the monthly IRS rates, just like the deferred payment sale, it is advantageous to fund a GRAT while interest rates are at an all-time low. This reduces the dollar amounts of the annuity payments that the client receives from the GRAT, thereby leaving more wealth for the client’s beneficiaries.

UEP: Thank you for the interview. Can you finish by summing up the concepts for our audience?

SO: The bottom line is that the lower the IRS interest rates, the less wealth the wealthy client receives back from a deferred payment sale, whether via a regular note, a self-cancelling installment note or a private annuity, and the lower the retained annuity payments from a GRAT. When you couple this with reduced asset values because of the Coronavirus issues, we have the PERFECT STORM!

See The Estate Planning "Perfect Storm" , Ultimate Estate Planner, June 5, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.


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