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Although we are facing many challenges on the health, economic, and market fronts, we would be remiss not to explore the positive ways that your estate plan may benefit from low interest rates and depressed asset values.  As with any planning strategy, it’s important to consult with your advisors to be sure you are incorporating strategies that are appropriate for your particular situation.

This article will discuss some of the more compelling wealth and estate planning opportunities, including: gifting assets with depreciated value; using a low interest rate environment to your advantage through vehicles such as grantor retained annuity trusts, intrafamily loans, and sales to intentionally defective grantor trusts; converting a traditional Individual Retirement Account (IRA) to a Roth IRA; and tax-loss harvesting. For those who already have an existing wealth plan in place, now may also be an opportune time to examine your plan to be sure that it’s optimally designed as you intended, and to explore any potential enhancements that might be made. The volatility in the market also brings heightened scrutiny and opportunities for executors of estates.

Gifting assets with depreciated value

If the value of your assets has declined due to challenging market conditions, this may be a perfect time to gift those assets. The federal estate, gift, and generation-skipping transfer (GST) tax exemption (collectively, the federal exemption), which is the amount you can transfer tax-free, is at an all-time high of $12.06 million for individuals and $24.12 million for married couples (www.irs.gov). While asset values are low, you may gift more of your assets to maximize the use of your federal lifetime gift tax exemption. This is because the amount of exemption used in making a gift is based on the fair market value of the asset transferred at the time of gift. It should also be noted that any future appreciation of these assets would be outside of your estate.  

Making the most of today’s high federal exemption

As mentioned earlier, the federal exemption amount is at an all-time high; however, this increased exemption is set to revert to $5 million, adjusted for inflation, on January 1, 2026, unless legislation is enacted prior to 2026 extending this increase (www.irs.gov). While 2026 may seem a long way off, it may be best to take advantage of the increase now by making larger gifts that use up some or all of your exemption. The earlier a gift is made, the longer it has to potentially grow outside of your estate. Importantly, the Internal Revenue Service (IRS) recently issued guidance that, if the exemption does decrease at some point in the future, gifts made prior to the decrease will not be clawed back and retroactively taxed. 

It must be noted that there is a very real possibility that, before 2026, the exemption could revert to previous levels and possibly go lower even still (as recently as 2003 the exemption was $1 million). Additionally, there has been much discussion by the current administration in the White House of changing the estate and gift tax laws and potentially adding new wealth taxes altogether (www.irs.gov). This is yet another reason why it may be best to make larger gifts now while the exemption remains high and there is some certainty about the taxation of these gifts.

Please see important disclosures at the end of the article.

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