The U.S. government has launched one of the largest economic stimulus packages in history – $3.5 trillion to date – in response to COVID-19 pandemic. Some are speculating this may increase to as much as $8-$9 trillion in total [1].  This massive government spending is compounded by the expectation of declining tax revenue from the rapidly slowing economy. The Congressional Budget Office projects a federal budget deficit of $3.7 trillion for the 2020 fiscal year [2], which would be the largest deficit since World War II.

There are several tax proposals being considered to deal with this historic shortfall in funding. While we are early in the speculation game, there are several proposals that are already being discussed, including:

  1. Lifting of the Social Security wage ceiling
  2. Increasing federal income tax rates
  3. Reducing the federal and state lifetime gift tax exemption amounts
  4. Increasing federal and state estate, gift and GST (generation skipping transfer) tax rates
  5. Eliminating lower federal capital gains tax rate in favor of higher ordinary income tax rates

Strategies Families Can Consider to Potentially Lessen the Impact

The good news is that there are planning strategies that families can consider in this challenging environment, which should be discussed with trusted advisors.  While the following list is not exhaustive, these strategies are well worth exploring:

  1. With the potential lift of the Social Security wage ceiling, individuals with closely held businesses may want to consider moving more of their compensation to distributions and dividends, and away from wages.
  2. With the potential increase in ordinary income tax rates, taxpayers may also want to consider a Roth IRA conversion, which is explored below.
  3. Individuals with taxable estates in excess of the federal estate tax exemption amount ($11.58 million per person, or $23.16 million per married couple in 2020) should consider utilizing their lifetime gift and GST tax exemptions (also $11.58 million per person, $23.16 million per married couple in 2020) [3]  before exemption amounts are reduced and/or tax rates are increased.  There are various structures highlighted below to use lifetime gift exemptions.

Roth IRA Conversion

Many earners are precluded from making contributions to Roth IRAs due to income limitations, however, the ability for those contributions and future appreciation to be distributed free of tax when income tax rates are expected to be higher in the future may provide a significant tax benefit. With a Roth IRA conversion, even high-income earners are permitted to shift money from their traditional IRA (where contributions were made with pre-tax dollars and distributions would be subject to tax) to a Roth IRA.  Because Roth IRAs are funded with after-tax contributions, if an individual decides to convert a traditional IRA to a Roth IRA, they will be required to pay tax on the assets being converted.  Given that traditional IRA account balances may be down as a result of market conditions, and an expectation that income tax rates could potentially go up, taxpayers with the ability to pay tax now may be wise to do so.  It is worth noting that a Roth conversion can be whole or partial and can even be staged over a number of years. In addition, an individual can use tax losses they incurred this year to off-set the tax due as a result of the Roth conversion.

Utilizing the Lifetime Gift & GST Tax Exemption – Gifts to Individuals and Trusts

The current gift, estate and GST tax exemption amounts ($11.58 million in 2020) [4]  are set to expire in December 2025, but there is increasing discussion about the exemption amounts being reduced and rates being increased before then.  Individuals may want to consider making lifetime gifts to their children or other family members before any unused exemption goes away.

Gifts can be made directly or through various irrevocable trusts. There are several ways to structure irrevocable trusts depending upon the amount of control the grantor/settlor (the person who creates the trusts) would like to retain. Trust law today allows increased flexibility to the grantor/settlor with structures like the Spousal Lifetime Access Trust (SLAT), which allows one’s spouse to retain access during his/her lifetime to the income and principal of the trust.  Provisions can be added to other irrevocable trusts to allow the grantor/settlor to access trust assets via loans or distributions, with approval of the beneficiaries.  These strategies can be highly customizable and should be discussed with your advisor.

The prospect of transferring assets to an irrevocable trust can be overwhelming, especially given the uncertainty regarding the future of exemption amounts and rate of tax.  One way to prepare to make a gift is to make loans to family members or trusts at the intra-family loan rate.  Interest rates are at near historical lows, with the May 2020 mid-term AFR rate for loans between three and nine years sitting at 0.58 percent annually [5].   If it becomes clear that the exemption will be reduced and that making a gift is appropriate considering a family’s balance sheet and wealth transfer goals, the loans came be forgiven (the forgiveness constitutes a gift and uses their exemption).

This is a relatively low-cost and administratively easy way to prepare to utilize the lifetime gift exemption while maintaining flexibility and the ability for principal to be repaid.

There are other strategies to consider in the face of rising tax rates.  Qualified Opportunity Zone (QOZ) investments, Private Placement Life Insurance (PPLI) and Maltese Pension Plans (MPP) are examples of strategies that defer, reduce and/or eliminate taxes payable on investment returns.  Those strategies will be explored in future articles by Cresset


[1] Ebiling, Ashlea. ‘The IRS Announces Higher Estate and Gift Tax Limits for 2020.’, Forbes, November 2019.
[3] Van Dam, Andrew.  ‘The U.S. has thrown more than $6 trillion at the coronavirus crisis. That number could grow.’, The Washington Post, April 2020.
[5] Ebiling, Ashlea. ‘The IRS Announces Higher Estate and Gift Tax Limits for 2020.’, Forbes, November 2019.


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