September 25, 2020

Volume X, Number 269

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Selling Assets to Reduce Your Estate Tax Exposure - Act Before September 30

If you have an estate that may be subject to estate tax next year, particularly if the November election results in a greatly reduced federal estate tax exemption in 2021, now is the time to remove assets from your taxable estate if you can comfortably afford to do so. One of the most effective ways to do this is to sell assets in exchange for a very low interest promissory note. 

We are currently experiencing historically low interest rates and, at the same time, many asset classes are undervalued. This creates “the perfect storm” for tax-free wealth transfers. This month, the long term Applicable Federal Rate, which is the minimum rate of interest that must be charged on inter-family loans with a term of 5 years or more, is only 1.0%. This means that you can sell a currently undervalued asset to a younger family member in exchange for a long-term promissory note with an annual 1% interest rate. By locking in this historically low interest rate for a period of years (e.g., 15 or more), you will have made a gift-and-estate-tax-free transfer to the younger generation of all future income generated by that asset and all future appreciation in excess of 1% per year.

The promissory note will still be included in your estate for estate tax purposes, but you have the option of forgiving note payments up to $15,000 per year (or $30,000 per year for a married couple) without triggering a gift tax during your life. It is also possible to structure the note as a self-cancelling installment note that will be cancelled at your death, thereby entirely eliminating the remaining balance then due on the note from your taxable estate. This requires using a higher interest rate to support the self-cancelling feature, but in the current historically low interest rate environment, the higher rate will still be quite low.

© Steptoe & Johnson PLLC. All Rights Reserved.National Law Review, Volume X, Number 260


About this Author

Kirk R. Wilson Estate Planning Lawyer Steptoe Johnson
Of Counsel

Kirk Wilson is a Texas and California board-certified specialist in estate planning, probate and trust law with an advanced law degree in Taxation (LL.M.).  Kirk assists clients with the preparation of comprehensive estate plans to create and preserve generational wealth in a tax-efficient manner, including planning for clients with assets and family members in multiple states and nations.

Working hand in hand with other professional advisors, including bankers, financial planners, insurance professionals, wealth managers, and CPAs, Kirk provides thoughtful legal counsel, taking...

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