Protecting Yourself, Your Family, and Your Heirs during the COVID-19 Crisis

Kevin Matz, Esq, CPA, LLM
Published Date:
Jun 1, 2020

We live in unprecedented times. Many of the tenets we thought we knew at the beginning of March 2020 have now been shattered by COVID-19, which has wreaked havoc not only on our nation’s public health but also on the worldwide economy and the financial markets. It has called into focus the need for families to review their current estate planning documents to ensure they provide protections to achieve both immediate and long-term goals and wishes. It’s also helpful to consider estate planning strategies that may be particularly appropriate in the current environment, once clarity has developed concerning the outlook for your business interests and other financial holdings.

An Essential Review of Estate Planning Documents

In uncharted times like these, it is more important than ever to review your fundamental estate planning documents to ensure that they carry out your wishes to protect both yourself and your family. Fundamental estate planning documents include a Will (including a revocable living trust that may be used in conjunction with a “pourover Will” as a “Will substitute”); healthcare proxy, including living Will; and durable power of attorney.

The healthcare proxy allows a person to designate someone else (i.e., their healthcare agent) to make healthcare decisions for them if they are unable to make those decisions themselves; thus, it is very important to discuss your wishes with your healthcare agent in advance. The durable power of attorney allows a person to designate someone else (i.e., their agent) to manage their financial affairs if they are unable to do so themselves. Likewise, it’s important to discuss your financial management wishes with your agent (or agents) in advance. 

Revocable trusts take on added significance in the current environment—where courts are closed or operating at reduced hours—to provide for the disposition of property upon a person’s death. In essence, revocable trusts are Will substitutes. Pourover Wills typically direct that most of the property owned in one’s own name at death will “pour over” to the revocable trust. There are no tax advantages to utilizing a revocable trust to carry out one’s testamentary wishes. A primary reason for utilizing a revocable trust is to avoid potentially burdensome court requirements relating to changing trustees of trusts under Wills, which require court proceedings and a court order to effectuate.

Importantly, revocable trusts may be partially funded during a person’s lifetime. Although this is not required as a technical matter, the advantages are two-fold. First, it will avoid delays associated with probate of a Will (at least as to those assets that were added to the trust during the individual’s lifetime). Thus, those who survive you will have immediate access to trust assets upon your death.  Second, funded revocable trusts provide a mechanism for management of assets during a person’s lifetime should this become necessary, such as in the event of future incapacity, and without having to rely exclusively on a durable power of attorney (which financial institutions can sometimes be slow in giving full effect to).

The benefits of using—and funding—revocable trusts during your lifetime takes on tremendous significance in the current environment. The Surrogate’s courts in New York are, in many instances, currently closed or operating at reduced hours. As a result, there is cause for concern that, while applications to probate one’s Will (including for preliminary letters testamentary) are pending, property that was owned by a decedent will effectively be frozen and unavailable for the needs of a decedent’s beneficiaries.

Moreover, the ability to manage or liquidate the decedent’s investment holdings to protect them from serious financial loss is critical. This is especially problematic given the enormous volatility in the current financial markets; even brief delays in obtaining access to assets can produce significant financial consequences. All of these problems can be avoided to the extent that a revocable trust has been funded prior to death. (It may also be possible to avoid these difficulties by using financial accounts that are payable upon death to a particular individual, such as joint accounts with right of survivorship, “Totten trusts,” “payable on death” or “transferable on death” accounts, or by creating and funding limited liability companies that designate successor managers.)

Remote notarization of documents and remote witnessing (including of Wills) may be available during this time of shelter-in-place and social distancing.

The Advantage of Estate Planning Strategies

From an estate planning strategy point of view, the most important consideration is to first obtain clarity concerning your holdings. In the context of family businesses, this involves obtaining clarity on the profitability of your businesses and the time horizon for recovery. Once that threshold determination has been made, you can begin to evaluate whether the timing is right to engage in further estate planning transactions. Today’s low values, extraordinary market volatility, and historically low interest rates present unique opportunities for estate planning. 

At the outset, there is a potential time sensitivity that wasn’t present prior to March 1, 2020. It is not beyond the realm of possibility that the current unprecedented exemptions for federal estate, gift, and generation-skipping transfer (GST) tax purposes—of $11.58 million per person in 2020 or $23.16 million for a married couple, and scheduled to “sunset” to roughly one-half of such amounts, as indexed for inflation, come January 1, 2026—may be changed after the end of this year, irrespective of the outcome of the upcoming November elections, given the huge federal deficits that are being amassed to pay for the federal stimulus programs. It is possible that the current New York estate tax exemption amount of $5.85 million for New Yorkers who die in 2020—which is subject to an “addback,” as a result of which taxable gifts made within three years of death are added to a New Yorker’s estate for estate tax purposes—may be reevaluated by New York, given the massive costs to New York State due to the COVID-19 emergency.

As noted above, particularly in the context of family businesses, owners will first need to develop clarity concerning the profitability of their businesses and the time horizon for recovery. That said, while such clarity begins to emerge, steps can be taken (such as coordinating with appraisers) so that transactions can proceed expeditiously when the business owner is ready. 

The following sections will delve into the tremendous opportunities for estate planning that are currently present due to depressed values, the enormous volatility of assets, and the historically low interest rates. 

Taking advantage of depressed values

The COVID-19 crisis has enormously impacted broad segments of the U.S. (and world) economy, and not solely the public securities markets. Interests in privately owned businesses and in real estate have, in many instances, been drastically affected by this crisis. In the case of real estate, rent rolls have taken huge hits, and leveraged holdings are, in many cases, only minimally (if at all) above water relative to the value of the debt secured by them. These factors can create a unique opportunity to transfer assets (including interests in entities that own real estate) to trusts for the benefit of lower-generation family members while their valuation is extraordinarily low. 

These transactions can be done by gift, by sale, or by part-gift and part-sale, including to an intentionally defective grantor trust (IDGT) that is designed to be outside of a person’s estate for gift and estate tax purposes, while still treated as belonging to the senior family member for income tax purposes. These transactions—including the payment of interest on promissory notes associated with sales to IDGTs at the extraordinarily low applicable federal rate (AFR) for tax purposes—are tax-free for income tax purposes under IRS pronouncements. (See Revenue Ruling 85-13 and Revenue Ruling 2004-64.)  Currently, these interest rates are at historic lows. For June 2020, the short-term rate for loans of up to three years is 0.18%, the mid-term rate for loans of more than three years and up to nine years is 0.43%, and the long-term rate for loans exceeding nine years is 1.01%.

What if the assets may later be needed by the senior generation family member? This is where a “spousal lifetime access trust” (or SLAT) can be particularly helpful. These are irrevocable trusts structured to give the grantor’s spouse access to the trust as a discretionary beneficiary of trust income and principal. The trust also can name children and grandchildren as beneficiaries.

As is the case with “dynasty trusts” (which are trusts that are structured to benefit multiple generations of family members, including grandchildren and more remote descendants), GST tax exemption can be allocated to the trust and future appreciation on the SLAT assets are shielded from transfer taxes. Such trusts can provide additional comfort that transferred wealth would still be available for a married couple, if needed down the road, through distributions to the spouse. The assets essentially can serve as a “rainy day fund” while allowing one to take maximum advantage of the current tax laws. 

Using GRATs to take advantage of extreme volatility

Extreme market volatility can produce extraordinary results in estate planning through the use of Grantor Retained Annuity Trusts (GRAT). GRATs are a popular technique used to transfer assets to family members without the imposition of any gift tax and with the added benefit of removing the assets transferred into the GRAT from the transferor’s estate (assuming the grantor survives the initial term, which can be as short as two years). GRATs take on added significance in a time of extreme market turbulence, where there is opportunity to take advantage of funding a GRAT when there is a downswing in values.

In a GRAT, a person transfers assets to a trust, while retaining the right to receive a fixed annuity for a specified term. The retained annuity is paid with any cash on hand or, if there is no cash, with in-kind distributions of assets held in the trust. At the end of the term, the remaining trust assets pass to the ultimate beneficiaries of the GRAT (for example, the person’s children and their issue or a trust for their benefit), free of any estate or gift tax.

The GRAT can be funded with any type of property, such as an interest in a closely held business or venture, hedge fund, private equity fund, or even marketable securities. The most important consideration is whether the selected assets are likely to appreciate during the GRAT term at a rate that exceeds the IRS hurdle rate (an interest rate published by the IRS every month). The value of the grantor’s retained annuity is calculated based on the IRS hurdle rate: the lower the IRS hurdle rate, the lower the annuity that is required to zero out the GRAT. The hurdle rate is 0.6% for transfers made in June 2020. If the trust’s assets appreciate at a rate greater than the hurdle rate, the excess appreciation will pass to the ultimate beneficiaries of the GRAT free of any gift tax. Thus, any asset expected to grow more than 0.6% a year may be a good candidate for funding a GRAT.

Other factors to take into account in selecting the assets to be transferred to a GRAT are whether they currently have a low valuation or represent a minority interest, which may qualify them for valuation discounts for lack of control and lack of marketability under current law.

Generally, the GRAT is structured to produce little or no taxable gift. This is known as a “zeroed out” GRAT. Under this plan, the annuity is set so that its present value is roughly equal to the fair market value of the property transferred to the GRAT, after taking into account any valuation discounts. There is virtually no gift tax cost associated with creating a zeroed out GRAT.

Other benefits of a GRAT bear mentioning. The transfer to a GRAT is virtually risk-free from a valuation perspective. If an asset for which there is no readily ascertainable market value is transferred to a GRAT and the IRS later challenges the value that you report for gift tax purposes, the GRAT annuity automatically increases in order to produce a near-zero gift. Accordingly, there is essentially no gift tax exposure. It should be noted, however, that GRATs generally do not provide the same opportunity for leverage for GST tax purposes that other estate planning techniques can provide in connection with transfers to or for the benefit of grandchildren or more remote descendants.

Another important feature of a GRAT is that the trust can permit the grantor to swap personal assets with assets in the trust. This can be a very valuable technique to “lock in” the tax-free appreciation for the benefit of your family members.

In short, there may be no better time than the present to consider GRATs: the IRS hurdle rate remains low, the market is volatile, valuations are depressed, and valuation discounts are available.

Using (and refinancing) intra-family loans to take advantage of historically low interest rates

Another technique that works very well in a low–interest rate environment is an intra-family loan. Each month, the IRS publishes interest rate tables that establish the lowest rate that, if properly documented, can be safely used for loans between family members without producing a taxable gift.  

As mentioned above, these interest rates are at historic lows—for June 2020, the short-term rate for loans of up to three years is 0.18%, the mid-term rate for loans of more than three years and up to nine years is 0.43%, and the long-term rate for loans exceeding nine years is 1.01%. Funds that are lent to children, or a trust for the benefit of children, will grow in the senior family member’s estate at this extraordinarily low interest rate, essentially creating a partial estate freeze plan. Those funds, in turn, can be put to use by the junior family member to purchase a residence or may be invested in a manner that hopefully will beat the hurdle interest rate.

In addition, existing loans can be refinanced at the AFR, and this can produce significant annual savings within the family, particularly if the “spread” between the current interest rate and the extraordinarily low June AFR for such loan is significant.

Making a loan to a trust for your children may be even more advantageous than making a loan outright if the trust is intentionally structured as a grantor trust for income tax purposes. Ordinarily, the interest payments on the note must be included in your taxable income, but if the payments are made by a grantor trust, they will have no income tax ramifications to you.

Alternatively, depending upon one’s circumstances, it may be more advantageous for senior family members to put some of their expanded federal gift and GST tax exemptions to work by making cash gifts to facilitate the prepayment of existing loans to family members and to trusts established for the benefit of family members.

Income Tax Considerations

GRATs, SLATs, and certain dynasty trusts can also enjoy an income tax advantage.

A GRAT or a SLAT is a “grantor trust,” and a dynasty trust can be structured as a grantor trust, meaning that one must pick up all items of income, credit, and deduction attributable to the trust property on a personal income tax return. Being saddled with the income tax liability may seem like a burden, but it is actually a great estate planning advantage, in that it allows the trust property to grow income tax–free for the beneficiaries, while reducing one’s estate gift tax. 

Another important feature of a grantor trust is that the trust can permit the grantor to swap personal assets with assets in the trust. This can be a very valuable technique for income tax basis planning.

Kevin Matz, JD, Esq., CPA, LLM, is a partner at the law firm of Stroock & Stroock & Lavan LLP in New York City. His practice is devoted principally to domestic and international estate and tax planning, family offices, and qualified opportunity zone (QOZ) funds, and he is a Fellow of the American College of Trust and Estate Counsel (ACTEC) and a co-chair of the Tax Committee of the Trusts and Estates Law Section of the New York State Bar Association. Mr. Matz is also currently the Secretary/Treasurer of the NYSSCPA and a past president of the Foundation for Accounting Education’s Board of Trustees. He writes and lectures frequently on estate and tax planning topics. He can be reached at or 212-806-6076.

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