By Greg Custer, EVP Whittier Trust Company in Newport Beach
What America faces now is similar to the five stages of grief, according to a professor of social work I recently spoke to. Every person will handle this pandemic stress differently. Some will be in denial, some angry, others will accept the circumstances.
How we respond is critical to our personal and financial wellbeing. We still must protect and provide for ourselves and our families. What should we do?
Fortunately, with investments and estate plans, there is always something you can do to protect and provide for your family. Up markets provide opportunities, and down markets provide different opportunities. Down markets present buying opportunities for investors, and that’s where much of the public and private discourse is focused as we each struggle to comprehend and manage the pandemic and its economic impact. Wise investors have been rebalancing their portfolios to both contain risk and position for recovering markets.
But savvy investors can’t ignore the present multigenerational opportunity, the silver lining in our financial cloud. Right now, down markets plus low interest rates present significant estate planning opportunities. While the short term is unsettling, current market conditions create rare opportunities for long-term family enrichment. Victoria Kahn, SVP, from our Nevada office, in addition to tax efficiencies, has suggested the following planning opportunities to consider, no matter your stage of life:
- Make Intra-Family Loans. It’s now possible to loan money at a nominal interest rate to a family member without being deemed to have made a gift. The IRS requires that the interest rate on loans between family members not be lower than the Applicable Federal Rate (“AFR”). This rate changes monthly, but can be fixed for the life of the loan.
- Make an Installment Sale to an Intentionally Defective Grantor Trust (“IDGT”). An IDGT is an irrevocable trust that is designed to make the grantor responsible for the trust’s income taxes including capital gains (with this tax payment not being deemed a gift).
- Create a Grantor Retained Annuity Trust or Charitable Lead Annuity Trust (“GRAT”). A GRAT is an irrevocable trust that pays back to the grantor a percentage of the value of the assets contributed for a period of two years, and at the end of the term, the assets remaining either distribute to the remainder beneficiaries (i.e. the beneficiaries other than the grantor) or remain in the trust for their benefit. A Charitable Lead Annuity Trust (“CLT”) is similar to a GRAT , with the payments over the initial term of years being made to charity (which can be a donor-advised fund created by the grantor) instead of the grantor.
- Gift Interests in the Family Business. Giving interests in family businesses, including investment vehicles such as family limited partnerships, is another excellent planning tool during times of market volatility. The business itself and or its underlying assets may have been impacted by the economic crisis. Making a gift when the asset has dipped in value can maximize the assets passed to future generations. And if you transfer a partial interest in the business, discount opportunities (sometimes as much as 30% or more) off the pro rata share of the business value remain possible under current IRS rules due to lack of control and lack of marketability associated with partial interest. An appraisal will be needed for the valuation.
- Establish a Multigenerational Nevada Irrevocable Trust. A Nevada irrevocable trust can exist for 365 years, allowing families to pass wealth into the future through many generations, without incurring federal transfer taxes. Nevada does not impose income tax on individuals or trusts, so income can accumulate and grow over time, free of state income tax – thus further enhancing overall growth over the life of the trust.
- Convert a Traditional IRA to a Roth IRA. A Roth IRA is a retirement account that grows income tax free, allows contributions to be made at any age (subject to limitations), generally provides for tax-free withdrawals after age 59½, and has no required minimum distributions, and importantly, future distributions will be income tax free.
- Substitute Assets in Existing Trusts. If you have previously created an irrevocable grantor trust, such as an intentionally defective grantor trust which permits a substitution of assets, swapping assets with better potential for growth can optimize the ultimate benefit of the trust. The economic impact of this pandemic has surely changed perceptions of portfolio risk. While rebalancing your investment portfolio, don’t ignore rebalancing assets in your existing trusts.
Whittier Trust Company and Whittier Trust Company of Nevada, Inc. are state chartered trust companies dedicated to collaborating with their clients and their clients’ advisors to optimize multigenerational family wealth. Headquartered in South Pasadena with offices in Newport Beach, the firm presently manages more than $13 billion for high net worth families. Visit https://www.whittiertrust.com.
Certainly, intra-family loans and intra-family property tax reduction, is possible mainly with niche firms, as the article summarizes. Greg Custer, at Whittier Trust Co. in Newport Beach does great job here, pointing out all the different avenues we can take with a trust. But trust loans have other uses, not described in depth here, and that is a trust loan from a niche trust lender, for heirs and beneficiaries determined to keep an inherited home for example, to buyout co-beneficiaries inheriting real property who wish to sell that mutually inherited property, leaving the beneficiaries who do not want to sell their inherited property the ability to keep that home, for example, and keep it at a low property tax base rate thanks to the property tax breaks Californians have enjoyed since 1978.
For me, a good example of a firm that specializes in non-traditional intra-family funding and property tax reduction, as they like to call it, is a unique firm called Commercial Loan Corp, that uses formulas like the parent to child exclusion or parent to child exemption for beneficiaries getting property and hopefully inheriting property taxes, while looking to avoid property tax reassessment. That boutique firm is at https://cloanc.com/tag/california-prop-58 It remains to be seen, however, how new tax measure Proposition 19 will affect the trust loan/Prop 58 process. Conversely, it’s possible in California and many other states to reduce property taxes through other financial solutions, for example from a property tax appeal firm that lowers taxes, like Paramount Property Tax Appeal Services in Newport Beach, CA at https://paramountpropertytaxappeal.com This firm, for instance, has a most interesting set of niche solutions to get taxes down as low as possible when dealing with Real Property Tax Appeal, Business Property Tax Appeal, Personal Property Compliance, Property Appraisal and Possessory Interest. For me, it’s well worth the effort to end up with the highest tax breaks possible… actually winning a large appeal, whether we’re wealthy or middle class property owners who have been over-charged by tax assessors in California, Nevada, Arizona, or Hawaii. Plus, I’ve looked at info-blogs that examine the status of Proposition 58 (now getting savaged by Proposition 19), like https://propertytaxtransfertrusts.com that looks clearly at programs that insure people are paying the lowest property tax possible.
Hey, why should we allow ourselves to be over-charged by a local government? No need to put up with that… and sometimes these over-charged scenarios are simply honest mistakes on the part of a tax assessor. It happens. So both trusts and other intra-family tax reduction solutions can help us save thousands every year – which is just as good as making thousands in extra income.