Are a dip in rates and an uptick in tax proposals a call to action?

May 15, 2019
Family office services Personal tax planning Tax policy

The IRS has announced the applicable federal interest rates (Revenue Ruling 2019-12) for May 2019. The section 7520 rate for May dropped slightly to 2.8 percent from April's 3.0 percent. The applicable federal rates used for intra-family loans, sales to defective trusts, and other planning techniques also decreased a bit.

A 20 basis point drop in the section 7520 rate is not particularly newsworthy, at least in the narrow context of the wealth transfer planning in which that rate is relevant. However, there is a broader context to consider, referring of course to the context of the tax proposals being floated by some of the Democrat candidates for President. In that context, even this slight dip in the section 7520 rate should serve as a gentle nudge to those who had no intention to revisit their plans until just prior to 2026, when the current rule's sunset and are replaced by the rules that were in place pre-2018.

Individuals could very reasonably wonder why it's worth reconsidering their wealth transfer plans before 2021, let alone before 2026. In our article titled "The estate, gift and GST tax exemption for 2018 is $11.18 million", we pointed out that the new law virtually doubled the gift, estate, and generation-skipping transfer tax exemptions, but left alone (and therefore still available), stepped-up basis at death, full design flexibility for grantor retained annuity trusts (GRATs) and sales to defective grantor trusts, valuation discounts and so forth. In other words, post-TCJA, individuals had all of the tools they had before…and then some. And, TCJA aside, the low-interest rates on which the tax economics of the most popular planning techniques thrive were still relatively low.

Given that between the enactment of TCJA and 2026, a whole lot could happen politically that could, shall we say, accelerate the sunset. In fact, based upon some of the proposals put forth by the Democrats, not only would the favorable TCJA exemptions be reduced, but that flexibility to plan with GRATs, for example, would be sharply curtailed.

Meanwhile, some Republicans are continuing to seek a full repeal of the estate tax.

We are not predicting any political outcome nor are we handicapping the odds for any proposal becoming law. We are, however, suggesting that any individuals whose estates post-2021 will exceed the thresholds referred to in some of the proposals should at least confer with their tax advisors about the implications of these proposals on their estate, business succession, and life insurance plans. In some cases, individuals may decide that it is better to act now while those loans, GRATs, sales, and other techniques are still available and well-priced at today's low-interest rates. In other cases, individuals may decide to defer taking such strategic steps (especially if they will lose control over valuable assets) until things come into sharper focus. In all cases, however, individuals will come away from those discussions better informed about how these developments might affect them and their plans.

RSM contributors