Revisiting Your Estate Plan –Intra-Family Promissory Notes

The Coronavirus pandemic has caused many individuals to revisit different aspects of their estate plan, whether it be to change the disposition of assets among family and charitable beneficiaries or reevaluate the tax consequences of an estate plan.

One of the primary goals of estate planning, in addition to many non-tax goals such as the preservation and protection of family wealth from non-family members, involves minimizing estate and gift taxes upon the transfer of wealth from senior family members to younger generations.

Sale to Grantor Trust: A common technique often used to shift wealth to younger generations involves the sale of unmarketable, non-voting business interests, such as limited partnership interests or nonvoting LLC units by a parent to a “grantor trust” (created by the parent, who is referred to as the grantor) for the benefit of junior family members in return for an installment note from the trust having a stated principal amount equal to the fair market value of the interest sold (taking into account any valuation discounts). Typically, the trust is intentionally designed to transfer assets for gift and estate tax purposes but not for income tax purposes so that transactions between the grantor and the trust do not give rise to any income tax consequences.

Often the installment note is structured as interest-only during the term of the note with a final payment of principal due at the end of the term of the note. The minimum interest rate required, in order to avoid any gift tax exposure, is referred to as the applicable federal rate (“AFR”), which is a government prescribed interest rate based on the market yields on treasury bills, and changes each month. Consequently, the lower the principal balance of the note and the lower the associated interest rate, the greater the wealth that builds up inside the trust which is outside of the taxable estate of the grantor. The AFR is dependent on the term of the note, which can be structured as short term (three years or less), mid-term (three to nine years) or long-term (over nine years).

Current events, including the increase in the federal estate and gift tax exemption, coupled with the decline in asset values and reduction in interest rates, largely due to the unfortunate Coronavirus pandemic, has created an environment where high net worth individuals can benefit significantly by implementing a wealth transfer plan or revisiting an existing plan which was formulated when interest rates were higher.

Existing Plans: In the case of an existing plan, it may be worth restructuring the note by reducing the rate. There would be several benefits. First and foremost, the lower interest payment allows more value to remain in the trust and less value coming back to the grantor’s taxable estate. Additionally, it may be the case, particularly under current circumstances, that cash flow is limited, so a lower AFR would take pressure off of the trustee to either liquidate assets in order to make the interest payments or invest in fixed income securities where it may otherwise not be optimal from an investment standpoint. To the extent the grantor is looking to the note as a source of cash flow, the trust can pay down principal.

Business Purpose: In all intra-family transactions it is important that there be a business purpose other than estate tax savings and that the parties conduct themselves as arms-length negotiators. Accordingly, in connection with the lowering of the interest rate the grantor must negotiate something in return, such as a partial pay-down of principal, additional funding of the trust, reduction in the term, additional security or a guaranty from a third party, which can include the children or another independent family entity.

While one’s family’s health is first and foremost as we face this pandemic, taking care of family members should also include providing economic security. High net worth individuals interested in shifting more wealth to future generations are well advised to consult counsel to explore the current opportunities as we will no doubt experience an increase in asset values and interest rates again.

The Time Is Right For A Grantor Retained Annuity Trust (“GRAT”)

A low interest rate environment is generally conducive to many estate planning techniques. On a monthly basis, the Internal Revenue Service (the “IRS”) promulgates the minimum interest rate that must be used for various estate planning techniques. As a result of COVID-19 and all the uncertainty in the financial markets, the current IRS prescribed interest rates are at historic lows.

Creation of Current GRAT: One estate planning technique that can be very successful in a low interest rate environment is a GRAT. The GRAT is a wealth transfer technique whereby a grantor makes a gift of assets to an irrevocable trust for certain named beneficiaries and retains the right to certain payments for a specified number of years chosen by the grantor (the “Retention Term”). Statistically speaking, the shorter the Retention Term of the GRAT, the more likely the GRAT will be successful. The minimum Retention Term must be two years. The grantor typically receives the same payment from the GRAT on an annual basis but it is also possible to delay a greater payment to the second year in a two year GRAT to give the asset more time to appreciate. At the end of the Retention Term, the remaining property in the GRAT (after the annuity payments are paid back to the grantor) passes to the trust beneficiaries.

If the grantor survives the Retention Term, any appreciation on the GRAT assets after the date the GRAT is funded (in excess of that earned based on the lower federal prescribed interest rate) will pass to the grantor’s remainder beneficiaries free of gift or estate tax. If the grantor does not survive the Retention Term, then part or all (depending upon the terms of the GRAT) of the value of the assets as of the grantor’s date of death will be included in the grantor’s taxable estate (which is the same position the grantor would have been in if the GRAT was not created). Many GRATs are structured as “zeroed out” GRATs such that the gift tax consequences upon creation are nominal. This means that a client who has already used his or her federal gift tax exemption may still benefit from forming a GRAT. GRATs can be particularly beneficial if funded with a rapidly appreciating asset that has a significant income stream.

For illustration purposes, if a two year GRAT is funded with $10 million in May, 2020 (when the IRS prescribed interest rate is 0.8%) and the assets appreciate at 7% per year, the results of the GRAT are as follows:

YearBeginning AmountGrowthAnnuity PaymentBalance

Upon creation of the GRAT, the amount of the gift is approximately $1, which must be reported on a gift tax return. As a result, under this scenario, $974,883 of assets can be transferred to your intended beneficiaries at a gift tax cost of approximately $1. If the assets appreciate at 10% per year, $1,474,084 of assets can be transferred to your intended beneficiaries at a gift tax cost of approximately $1.

Planning for Existing GRATs: If you created a GRAT that is currently in existence, the downturn in the market may result in the GRAT being unsuccessful (i.e., after the remaining annuity payments are made to you, there may be no assets remaining in the GRAT to pass to the remainder beneficiaries of the GRAT). In such a situation, if you think that the assets that are in the GRAT may rebound and substantially increase over time, you may want to consider swapping (or exchanging) non-appreciating assets (i.e., cash, bonds or a promissory note) for the assets in the GRAT. Once you have swapped the assets out of the GRAT, you can take those depreciated assets and transfer them to a new GRAT. The assets you transfer to the new GRAT (i.e, cash, bonds or a promissory note) would just be paid back to you over time as the existing GRAT continues to make annuity payments to you.

Conclusion: In this low interest rate environment, if you would like to explore the creation of a GRAT, or would like us to review any current GRATs in existence, please let us know. Please keep in mind that prescribed IRS interest rates change each month so the examples set forth in this article would change depending on the month the GRAT is established.

Changes to Retirement Accounts Under the CARES Act

Under the recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), certain temporary changes were made to the laws governing retirement accounts. Some of the more significant changes are summarized below:

  1. Required Minimum Distributions have been waived for 2020 and you are not required to withdraw your Required Minimum Distribution this year. If you have already taken your Required Minimum Distribution, you may be able to reverse the distribution (and not pay any income taxes on it) if less than 60 days have lapsed since you withdrew your Required Minimum Distribution. Depending on the timing of your 2020 Required Minimum Distribution, there may be relief available. Please note that there are certain other technical requirements, but the 60 day rule is the most difficult hurdle.
  2. The date for making 2019 Individual Retirement Account (“IRA”) and Roth IRA contributions has been extended from April 15, 2020 to July 15, 2020. Therefore, if you failed to make contributions for 2019 prior to April 15, 2020, you now have an additional three months to make such contributions.
  3. With regard to any amounts you may want to borrow from your retirement plan, under the CARES Act, the maximum amount that may be borrowed is the lesser of $100,000 or 100% of the account balance. Prior to the CARES Act, the maximum amount that could be borrowed was the lesser of $50,000 and 50% of the account balance. This higher amount only applies to loans taken out within 180 days of the passage of the CARES Act. In addition, any loan repayments could be suspended for one year.

If you would like to discuss the changes to the laws governing Retirement Accounts under the recently enacted CARES Act, please contact one of our Private Wealth Services attorneys.

Maintenance of Records

As we continue to practice safe social distancing in our homes, and continually look for tasks to keep us occupied, one important task that is often overlooked is the compilation and maintenance of your “important papers,” including financial information and estate planning documents in an organized manner.

Some of the information that you should compile is as follows:

Legal Documents such as your estate planning documents (Health Care Advance Directives, Financial Durable Powers of Attorney, Wills, Trusts, Separate Writings, etc.), deeds, automobile titles, operating agreements for entities, promissory notes, etc.

Please note that you may want to pay particular attention to and review your Health Care Advance Directive (or Living Will) in light of COVID-19. It is our understanding that at this time no hospitals or physicians have used an Advance Directive to eliminate care for a COVID-19 patient; however, we highly recommend that you unambiguously communicate wishes regarding COVID-19 to your health care surrogates, and include advising your surrogates whether you wish to have experimental treatments, intubation and ventilation if necessary. Furthermore, if you are admitted to a hospital with COVID-19, you should unambiguously state to your treating physician upon admission what your wishes are regarding medical treatments available for COVID-19, including experimental treatments and intubation and ventilation if necessary, and that your medical providers are authorized to take direction from your health care surrogate, by phone, FaceTime, and other remote methods.

If COVID-19 has you concerned regarding your health and that has led to further contemplation regarding your Advance Directive directions, such as adding specific language relating to experimental medical treatments, other extraordinary measures, remote communication with your surrogate, or reconsidering the terms of the Advance Directive or its use altogether, please let us know, so that we may work with you to revise your documents accordingly. If you would like to have a new Advance Directive prepared, please let us know and we will prepare a new Advance Directive that includes language allowing your surrogate to make health care decisions as you have determined necessary.

Insurance Policies, including, medical, dental, life insurance, homeowners, personal property, automobile, long-term care and umbrella. Obviously, gathering your medical information would be of particular importance during the COVID-19 pandemic.

Contact Information for family members, business partners, financial advisors, insurance agents, doctors, attorneys and accountants.

Personal Information such as computer user names and passwords (for e-mail accounts, social media accounts, etc.), safety deposit box information (including keys and contents), credit cards, driver’s license, birth certificate, combination to any safe, club membership records and military service records.

Financial Information, including names of financial institutions, account numbers and passwords. For retirement accounts and life insurance policies, this would also include beneficiary designations. Also, information on any pensions should be maintained.

Tax Documentation such as income tax returns and gift tax returns, and information you have been collecting to prepare your tax returns for the current years (including 1099s, W-2’s, charitable contributions, etc.).

Funeral Instructions such as burial, funeral or cremation arrangements, and any instructions for the type of ceremony desired.

Traditionally, this type of information would be kept in a binder in a secure place in your residence (such as a safe). However, clients have increasingly been maintaining this information electronically on their personal computers. Regardless of how this information is stored, it should be periodically updated from time to time. In addition, it may be advisable to provide your estate planning attorneys with the location of this stored information and the identity of those to whom you have given access.

COVID-19: What Florida Employers of Domestic Workers Need to Know

Governor’s Stay Home Order: On April 1, 2020, Florida Governor Ron DeSantis issued an executive order requiring all persons in Florida to limit their movements and personal interactions outside of their home to only those necessary to obtain or provide essential services or to conduct essential activities. The order also requires senior citizens and individuals with significant underlying medical conditions to stay at home and take all measures to limit risk of exposure to COVID-19.

Some household employees may be permitted to travel to and from work under the Governor’s safer at home order if the services they provide are considered “essential services.” Specifically, “essential services” which allow travel outside of the home include:

  • home-based care provided for seniors, adults or children;
  • workers in dependent care services who support workers in other essential products and services;
  • childcare providers that enable other exempted employees to work; and
  • workers performing services in support of the elderly and disabled populations.

Unfortunately, the Governor’s order does not define “home-based care,” “dependent care services,” or “services in support of the elderly and disabled populations” to give greater guidance on the extent which all domestic staff may qualify. You should carefully consider which of your domestic staff qualify as essential when deciding whether they should continue to work during this time.

Pay Requirements: Remember that domestic service workers who provide services of a household nature in a private home are covered by the Fair Labor Standards Act. This means that any domestic workers who are working must be paid at least the federal minimum wage for all hours worked and overtime pay unless they are subject to an exemption.

The recently passed Families First Coronavirus Response Act (FFCRA) requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. The FFCRA went into effect on April 1, 2020 and applies to leave taken between April 1, 2020 and December 31, 2020. Neither the FFCRA nor the guidance published by the Department of Labor specifically mention household employees or domestic workers. However, generally, an employer that employs less than 500 employees is a covered employer that must provide paid sick leave and expanded family medical leave. There is a small business exemption to the FFCRA, which provides that an employer with less than 50 employees is exempt from providing paid sick leave and expanded family and medical leave, but only when doing so would jeopardize the viability of the small business as a going concern.

Employees are only entitled to paid leave if you otherwise have work for them to do and they are unable to perform their work due to one or more covered reason. Covered reasons include:

  • the employee is subject to a federal, state, or local quarantine order;
  • the employee has been advised by a medical professional to self-isolate;
  • the employee is exhibiting symptoms of COVID-19 and seeking a diagnosis;
  • the employee is taking care of an individual who is under a federal, state or local order to quarantine or a physician’s recommendation to isolate; or
  • the employee needs to care for a son or daughter whose school or place of care is closed.

Of note, a worker may not take paid sick leave under the FFCRA if the worker unilaterally decides to self-quarantine without medical advice, even if the worker exhibits symptoms of COVID-19. If you choose to suspend the domestic employee’s duties, the employee will not be eligible for paid sick leave or expanded family and medical leave.

The Governer’s Order expires April 30, 2020, unless extended by subsequent order.

If you have questions about whether your domestic staff is entitled to leave under this new law, please contact Gunster’s Employment Practice Group.

Lady working on paperwork

All references to available/allowable estate tax exemptions and credits relate only to persons who are U.S. citizens; references to gift tax exemptions/exclusions generally apply to U.S. citizens and U.S. Lawful Permanent Residents (i.e., “green card” holders). While most transfer tax savings techniques discussed can be fine-tuned to benefit non-U.S. citizens, the results will differ and must be addressed on a case-by-case basis.

The 2020 Annual Exclusion is an aggregate of $15,000 per donee, from each donor; or $30,000 per couple, if a husband and wife file a “split gift” Gift Tax Return on gifts made from either of their assets this year. Medical/Tuition [“ed/med”] Exclusion Gifts allow a donor to pay an unlimited amount for anyone’s medical or tuition expenses (including health insurance premiums), if paid directly to the service provider,without incurring any gift tax or use of their unified credit; and, if properly structured, ed/med gifts should not reduce the $15,000 amount available to be given to the same person by a donor each year.

This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication. Tax Advice Disclosure: To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.


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