Opportunities to preserve generational wealth during the disruption

Although the pandemic has brought with it a host of challenges, for borrowers, there are areas of opportunity. The low interest rate environment, for example, has created low-cost borrowing options for refinancing. There is also a favorable tax environment and conditions that make now a good time for gifting estates, especially those that are expected to grow.

“Now is a time for high-net-worth individuals to utilize the current difficult market to take advantage of low interest rates and market volatility,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

Smart Business spoke with Altman about some opportunities high-net-worth individuals should capitalize on while the conditions are favorable.

How can individuals take advantage of current interest rates?

With interest rates at historic lows and values depressed, now is a good time to gift or sell assets expected to increase in value to the next generation. By selling assets, such as a business interest, to a generational trust in exchange for a promissory note, interest rates can be frozen at historically low rates, currently less than 1 percent.

The IRS offered guidance as to these rates by issuing Applicable Federal Rates monthly. If the trust is paying interest on an existing note that is higher than 1 percent, it’s to the advantage of those in the next generation to renegotiate those notes.

Now is also a good time to consider refinancing a mortgage or other debt. Those whose mortgage interest is above 4 percent could refinance and drop down into the 3-3.5 percent range. People are doing that with certain types of trust structures when they’ve sold assets to that trust.

Why is it important to take advantage of estate tax exemptions now?

Currently, individuals can pass $11,580,000 estate and gift tax-free during their lifetime or at death. And those who are married can double that amount. This, however, is temporary, because the law is going to sunset at the end of December 2025. So right now, there’s a limited opportunity to transfer that appreciation.

With the volatility of the market, it’s unclear what the financial situation of many wealthy individuals could be. If a gift is made now, because businesses are not as profitable as they were the previous two years, it could potentially result in a lower valuation. That could work to someone’s advantage because a lower value means using less of the exemption, which means more of the exemption is left over to gift other assets. That could be a huge boon to a family and its heirs.

Why is now a good time to pay income taxes?

The income tax landscape is also expected to change. The current tax law is set to expire in 2026. And when it does, the highest individual tax rates will increase. So, now may be a good time to pay income taxes because it can be done at what would be lower rates than we may have in the future.

Another strategy to consider is converting an existing IRA to a Roth IRA, and pay taxes at 37 percent at the top versus 39.6. This offers a chance to manage the overall tax impact to a family when making a generational wealth transfer. It should be very enticing because of the expected rate changes.

For business owners, there are a lot of ways in which they can proactively tax plan now through their business. Owners could try to time some of their revenue in between this year or next year, look at certain deductions and possibly take advantage of some of the provisions in the recent CARES Act to lower their tax burden.

Be mindful of the opportunities that are available in this very uncertain time. Even those who don’t feel they’re in a position to make these gifts should revisit their goals and objectives in their estate and business succession plans to see what opportunities exist. There may be significant savings available that would preserve wealth for generations to come.

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