Why Floridians Should Consider Gifting Estate Assets During the COVID-19 Economic Downturn

Did you know the federal estate tax can reach up to 40 percent of a deceased person’s wealth after $11.58 million? Obviously, wealthy families at risk of losing nearly half of their taxable estate to a “death tax” would benefit from pursuing estate planning strategies to mitigate their estate tax exposure. It is not just the super-rich, however, who should be concerned.

The current federal estate tax limit is scheduled to drop to a projected $6-7 million (the number is tied to an index) on January 1, 2026, and a change in presidential administration in November would almost certainly lead to a faster and lower reduction. In 2016, for example, an attempt to lower the estate tax exemption to $3.5 million was under consideration. Now, consider that 15 states and the District of Columbia also have an estate tax, and that six states have an inheritance tax. Moreover, families not currently in jeopardy may be at risk at some point in the future due to appreciating estate assets.

In any case, gifting assets to family members while the estate-holder is still alive is an effective strategy for reducing the overall value of an estate and lowering applicable taxes. The IRS, however, understands this and applies gift taxes to asset giveaways. That said, current COVID-19 market conditions have created rare opportunities to maximize estate wealth transfers and mitigate associated taxes.

First, asset values are essentially frozen once they are transferred out of an estate. Further, with the coronavirus-induced economic shutdown depressing tangible property prices and investment values, transferring undervalued assets now will lock in lower values and lower corresponding tax liabilities. Plus, when the economy recovers, your chosen recipients will benefit from the assets’ likely appreciation.

The Internal Revenue Service also applies applicable federal rates (AFR) to loans between private parties, like family members, and AFR rates are at an all-time low. According to the April 2020 data, the current short-term rate is 0.91 percent whereas in April 2019 it was 2.52 percent. This makes loans to family members incredibly cheap and any gains they might make from investing the loan would escape estate and gift taxes. The cheap AFR environment also makes other wealth transfer techniques more effective.

While gifting estate assets might be ideal during the current economic downturn, wealth transfers can be extremely complicated. We encourage you not to try this alone. Do not hesitate to contact us. We are an experienced Florida estate planning firm that can help you better understand and learn more about how current market conditions can benefit your Florida estate planning goals.