We are in the midst of a public health crisis and its effect on the global economy will not be fully understood for some time. Navigating through this unprecedented territory raises challenges and concerns, not only about health and safety, first and foremost, but also about personal finances and tax planning strategies. As updates about the COVID-19 outbreak are rapidly evolving, we want to provide our clients with streamlined information on what you can do during this time of uncertainty and how Withers can help.
Current economic impact of COVID-19
Over the last several weeks, we have witnessed a turbulent stock market. While uncertainty in the market is nothing new, investors are currently faced with an unknown factor – a global pandemic that has abruptly slowed down economic activity globally.
The US federal government is trying to combat these fears by taking action to help stabilize the economy. One such course of action was announced earlier this week when the Federal Reserve cut interest rates by a full percentage point to zero. Since interest rates affect the cost of borrowing, this could impact you personally through the cost of mortgages, interest rates on credit cards, and interest earned on savings accounts.
On a broader scale, a rate cut by the US federal government is intended to encourage commercial activity. If consumers can borrow money at a lower cost, they are expected to spend more, which will in turn stimulate economic growth. This is a traditional financial solution that we have seen help stabilize the stock market in the past. However, COVID-19 is a threat that is not fully understood and support from the central bank may not address all of the issues we are currently facing. Unlike prior economic downturns, we are challenged with more than just a consumer demand problem. With factories temporarily closed and restrictions in the transportation industry, we also have a supply issue. In addition, the consumer demand problem we see now is different than in those that have been addressed in the past. Now, even if consumers are encouraged by a rate cut to go out and spend money, they don’t want to, or are unable to, actually go out and spend it.
However, there are sectors of the economy that have seen an uptick. Online demand has increased, as has the demand for delivery services. Therefore, while consumers are not physically going out to spend money, we have more technological advances today than we have had in the past, which allows goods and services to be delivered directly to the consumer’s doorstep, and may help stabilize the economy and impede the recession that is waiting in the wings.
It is important that we understand and accept that the current crisis will have an impact on the global economy, even if we cannot yet fully comprehend the extent of that impact.
What you can do
While estate planning may not be your main focus right now, you can take this opportunity from canceled travel and events to review your current plan to ensure it reflects your overall wishes, especially in a turbulent market.
Confirm the fiduciaries you have named in your Will, Trust(s), Durable Power Attorney, and Advanced Health Care Directive are still available to act and are still appropriate choices for your plan.
Ensure all of your assets have been retitled to the name of your Trust.
Review the dispositive provisions of your estate plan; make sure the beneficiaries you have named and the assets they are due to receive still reflect your current wishes.
If you have created irrevocable grantor trusts, you should review the basis of the assets owned by the trusts. If appropriate, you may want to utilize the substitution power in these trusts to swap any low basis assets held in trust for high basis assets you own individually.
You may also want to consider more sophisticated planning techniques that are desirable in a depressed market when you can take advantage of lower interest rates and lower asset values.
Annual exclusion gifts: you can make an annual tax-free gift of $15,000 per person ($30,000 if you are married) that is excluded from your lifetime gift tax exemption amount. Rather than making these gifts in cash, you can leverage these gifts by using marketable securities while value is low and take advantage of the appreciation when the market recovers.
Fund trusts with exemption amounts: under current law, the exemption amount for estate, gift, and generation-skipping transfer taxes is $11,580,000 ($23,160,000 for married couples). The exemption is scheduled to sunset and in 2026 will revert back to $5,000,000 ($10,000,000 for married couples), adjusted for inflation. If you are considering utilizing the current increased exemption amount to make gifts, funding a trust with marketable securities while values are low will allow you to leverage your gift, similar to the annual exclusion gifts.
Implement a grantor retained annuity trust (“GRAT”): the down market, coupled with a low interest rate environment, increases the effectiveness of a GRAT. You can learn more about this in the article by our colleague Ed Renn, titled “Planning Opportunities During Market Volatility,” which can be found here.
Overall, when reviewing your current plan or considering additional planning opportunities, it is important to focus on your particular values and long-term goals. Estate plans are designed to cycle through good and bad markets – the best thing you can do is remain calm and ensure that your plan provides flexibility and reflects your long-term family mission.
What Withers can do for you
We want to assure you that our firm is closely monitoring the rapid changes associated with COVID-19 on a global scale, and we are doing so with our clients in mind. We are ready to address your concerns, review your individual options, and provide you with guidance in these uncertain times.
If you would like to discuss your current estate plan or proactively implement additional planning structures in this volatile market, please contact your Withers attorney.
