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Looking Beyond the COVID-19 Crisis

Key Points:

First and foremost, we hope you and your families are well and managing as best as possible during these unprecedented times. Although this crisis presents innumerable unforeseen challenges in the short run, it also presents certain opportunities to consider taking advantage of in the long run, if appropriate, in a timely fashion. These include:

  • Making changes to or creating an estate plan, which can be prepared remotely through the use of virtual notarizations, virtual witnessing or alternatives to witnessing.
  • Making estate planning transfers of assets at a time of advantageous values, including depressed valuations and low interest rates. Crafting win-win structured settlements to previously unsettleable cases and novel settlement opportunities for those who think outside the box.
  • Preparing to implement steps before the year-end in anticipation of higher tax rates, new taxes, and lower exemptions that may take effect some time in 2021.

Estate Planning Changes. The current health crisis is reminding people for whom planning has been on the back burner that it is important to make the changes necessary to keep one's estate plans current (and put an estate plan in place in the case of those who do not have one). All changes to existing documents, as well as the creation of new documents, can be prepared remotely. Execution of documents has its challenges during these times of shelter in place, but there are many potential solutions. The governors of many states have permitted virtual notarizations under many circumstances, and some states permit virtual witnessing as well. Where witnessing is required, such as for wills, and where virtual witnessing is not permitted, one can consider declarations of trust instead, which generally do not require witnessing. One can also consider holographic (i.e., handwritten) wills, which also do not require witnessing and which are options in most states — in some states, under limited circumstances, that may or may not apply, but it may apply in other states under much broader circumstances or even all circumstances.

Depressed Valuations. Depressed valuations present a good opportunity to make estate planning transfers of assets at advantageous values. The transfers can be simple outright transfers or leveraged transfers using one or more traditional estate planning devices. Without further Congressional action, the $10 million applicable exclusion from gift, estate and generation-skipping transfer taxes, indexed for inflation (this year $11.58 million per person), is due to sunset on December 31, 2025. Of course, it could be repealed sooner. But even if it is extended past 2025, it always makes sense to use one's transfer tax exemption sooner rather than later (to remove future income from, and appreciation to, transferred assets, as well as the underlying assets themselves). What better time than when valuations are depressed?

Low Interest Rates. Low interest rates present an unparalleled opportunity to create grantor retained annuity trusts and to make tax free sales to grantor trusts (both a means to transfer future appreciation to assets) when the hurdle rates (i.e. the rate of return that must be retained by the transferor or seller) are unprecedentedly low, and they are so likely to work well ― and when there is no downside, if they don't for some reason beat these historically low hurdle rates. The exceptionally low interest rate environment presents a rare opportunity to move appreciation out of one's estate, in many cases without having to use any of one's lifetime transfer tax exclusion. Low interest rates also work well for private annuities, which might be advantageous for individuals of compromised health, for self-canceling installment notes and for charitable lead trusts. One might consider refinancing existing notes at these new lower rates, and, in the case of estate litigation, if funds need to be borrowed or assets purchased over time to effect a settlement, the cost of borrowing (or paying over time) to effectuate a settlement may never be lower.

Internal Revenue Service Notice 2020-18. The Notice provides that federal income tax returns (and respective tax payments) are not due until July 15 in the case of individuals, estates, partnerships, S Corporations and C Corporations, where the returns were originally due on April 15. It is unclear whether gift tax returns and payments may have been extended. Estate tax returns and payments have NOT been extended, nor have fiduciary income tax returns for estates not on a calendar year. Some states automatically follow federal filing and payment procedures, but others do not and will have to issue guidance before one can delay filing and payment at the state level.

Estates and Trusts Administration Deadlines. While statutes of limitations have generally been suspended and some federal income tax returns and payments have been delayed, the remaining myriad of routine local, state and federal tax and non-tax filing and reporting deadlines in the routine administration of estates and trusts generally have NOT been suspended. While one would hope that missed deadlines will be treated leniently, care should be taken to make sure that all deadlines continue to be met and estates and trusts continue to be administered pursuant to existing rules and regulations.

Estate, Trust and Fiduciary Litigations. With statutes of limitations being suspended by many states, and with most state and federal courts suspending the discovery process and motion calendars for most pending proceedings and the ability to file most new proceedings, operating on a triage-only basis, this may be the "wake up" call that litigants need to recognize that they cannot depend upon the courts to solve their problems, at least not for many years (and perhaps not in their lifetimes, creating litigation havoc for the beneficiaries of their estates). There now may be a premium on crafting win-win structured settlement to previously unsettleable cases. The new planning opportunities created by the current crisis may well provide novel settlement opportunities for those who think outside the box.

Day Counts. For foreign individuals who may be in trouble with their day counts in avoiding US or other taxation, with proper planning, the inability to travel may create an opportunity to avoid what would otherwise be tripping a tax trap.

Donative Transfers Across Borders. Well intentioned donors assisting family members in need in other countries, whether US donors to non-US family members or non-US donors to US family members, should be careful to avoid triggering adverse tax or other consequences, either to themselves or to the recipients, in connection with these well-intentioned transfers.

Possible Change of Administrations and Legislative Changes. Year-end this year will likely require more planning changes than usual, particularly if there is a change in administration. Even without a change in administration, however, one can expect the possibility of unforeseen changes in response to the cost of dealing with the current crisis. Thought should be given now to prepare for what steps, if any, one might want to implement before year-end in anticipation of higher tax rates, new taxes, lower exemptions, etc. that may take effect some time in 2021.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 86

TRENDING LEGAL ANALYSIS


About this Author

David M. Allen, Katten Muchin, Tax Attorney, business planning
Associate

David M. Allen's practice focuses on tax, succession and business planning for clients of significant wealth, including closely held business owners, private equity fund managers, art collectors, corporate executives and other professionals. He handles a wide variety of matters for these clients on local, national and international levels. David is highly skilled in advising clients with regard to tax, succession and charitable planning, probate administration, the integration of estate plans and corporate structures, and cross-border tax planning.

...

312-902-5260
Michelle R. Canerday Private Wealth Attorney Katten Muchin Rosenman Chicago, IL
Partner

Michelle Canerday understands how important it is for clients to have an estate plan that minimizes taxes and protects their assets for future generations. That's why individuals, wealthy families and business owners seek her advice on complex estate, gift and charitable planning matters, as well as on disputes concerning trusts and estates. She structures and drafts wills and trusts, handles estate administration, helps businesses with succession planning, represents trustees and beneficiaries in trust disputes, and provides strategies to private equity fund principals on how to minimize taxes. Family offices and nonprofits also turn to Michelle for legal counsel in these areas.

Well-versed in estate planning and administration

Preparing wills, trusts (including qualified personal residence, dynasty and insurance trusts) powers of attorney, and any other phase of estate and premarital planning is what Michelle knows best. Her experience spans across the entire process of administering trusts and estates, from counseling trustees and executors, opening probate, and preparing and filing estate and gift tax returns to handling daily administration issues and audits.

Moreover, if a family finds itself in a trust and estate dispute, Michelle is there to negotiate settlement agreements and virtual representation agreements, work closely with litigation counsel to create strategies and assist on fiduciary duties, and even handle the case in trial, if it ultimately comes to that point.

312.902.5515
Neil V. Carbone, Estate, Trust, Attorney, Katten, Law Firm
Attorney

Neil V. Carbone concentrates his practice in trust and estates law, with a focus in estate planning, administration and litigation, including issues pertaining to taxation, business organizations, property rights, estate plans, wills, trusts, insurance trusts, living wills, health care proxies and powers of attorney. He has an extensive background in litigation and in Surrogate’s Court matters and procedures.

Prior to entering private practice, Neil was a senior court attorney at the New York Court of Appeals.

212-940-6786
Bonnie Lynn Chmil, Litigation Lawyer, Katten Muchin Law firm
Associate

Bonnie Lynn Chmil concentrates her practice in litigation. She has represented clients in a wide range of matters involving commercial contracts, lender liability, trusts and estates, securities, antitrust, regulatory inquiries, intellectual property, financial services, employment, bankruptcy adversary claims and statutory and common law claims.

212-940-6415
Adam M. Damerow Private Wealth Attorney Katten Muchin Rosenman Chicago, IL
Partner

Adam Damerow assists ultra high-net-worth individuals in creating tax-efficient estate plans to preserve, protect and transfer wealth to future generations. He also guides fiduciaries and beneficiaries through disputes over estates and trusts, often helping them avoid the time, expense and burden of litigation.

Advising clients with both pragmatism and strategy

Adam focuses solely on private client matters. He knows that wealth creators don't just want to transfer their wealth in tax-efficient ways; they want to give their beneficiaries the flexibility to use and maintain...

312.902.5250