Strategies for US Inheritance Tax
and Re-appraisals of Businesses
Rich Americans are taking advantage of an unprecedented opportunity to transfer money to their children and grandchildren tax-free.
Thanks to the 2017 Republican tax overhaul, it was already easier than ever to avoid the U.S. estate and gift tax. Now, plunging interest rates and volatile equity markets are creating a once-in-a-lifetime chance.
Key interest rates set by the Internal Revenue Service for estate-planning purposes have never been as low as they are right now.
For example, the “Section 7520” rate fell to 0.8% in May from 1.2% in April. It had been well above 2% for most of last year. The last time it was this low was in January, 2013 at 1%.
The simplest way to take advantage of the low rates is to loan cash or other assets to family members. Heirs can borrow millions of dollars, then invest the money and profit from any upside.
The Best Strategy
Beneficiaries can lock in today’s ultra-low rates for years or even decades. The IRS-required rate on “mid-term” loans of 3 to 9 years is 0.58% in May. The rate on longer-term loans — which can last 20 years or more — is 1.15%.
Go for the long-term loans. This gets you a historically low rate that can last for decades.
The U.S.’s estate and gift tax exemption — the amount that Americans can transfer to heirs without triggering the tax – is $11.6 million for individuals and more than $23 million for married couples. Any amounts higher pays a 40% inheritance tax.
Beneficiaries can also profit from any future investment gains — with no risk of losing money — as long as those returns are higher than the IRS-required interest rate. This is called the “grantor retained annuity trust” (GRAT). The lower the interest rates, the easier for heirs to make money.
Volatile markets have dented many portfolios, but low valuations also make it possible to transfer assets to heirs without using up as much of the gift-tax exemption.
Get third-party appraisals of your private businesses and real estate. The goal is to give, lend or sell the assets – at prices reflecting the economic slowdown – to trusts or other structures benefiting future generations.
Former Vice President Joe Biden, the Democrats’ nominee, has proposed closing estate-tax loopholes. So, things may change quickly in November.
