Covid Crisis, Creates Opportunities for Wealth Transfer

At M3 Family Office we strive to be the gatekeepers of your wealth through comprehensive investment management and generational wealth transfer services. With extensive modeling and creative planning we aim to help you achieve your goals.  

Today may be the most favorable time in recent history to transfer wealth to your descendants. This is true, thanks to unique economic conditions and access to creative estate planning strategies. 

Wealth Transfer Opportunities in the COVID Crisis

We are in the midst of a perfect storm, one which is creating unique opportunities for the transfer of your wealth. One side of the equation is a change in the amount of wealth that is transferrable. The annual exclusion and the lifetime estate tax exemption increased to over $23 million for couples. Signed into law with the Tax Reform of 2017, this increased how much wealth can be transferred to the following generation. The other side of the equation is the shrinking window of time to use the exemption at the increased amount. The recent, gigantic stimulus packages are increasing the deficit by trillions of dollars, leading to an inevitable ballooning of the Federal Debt. The political climate today is ripe for a tax increase to pay for all the government spending. Inevitably, there will be a call to address the estate tax exemption limit in conjunction with the increase in taxes.

Who will foot the bill?

Who else but the rich? There is no way the math of spending trillions of dollars works without a tax hike. It is naïve to think taxes can be raised on the countless small businesses, or middle class / working poor – who in astonishing proportions live paycheck to paycheck – who have been devastated by the lockdowns of the past two months. 

Economic theory is clear, the government is the spender of last resort. Most Americans, small business, and states were operating with minimal reserves when COVID came to town. They were the most vulnerable. With the Federal Government as the backstop (and regardless of your politics) a tax increase on the wealthy is coming. 

If we layer the political situation on to the economic one, the likelihood of a tax hike on the wealthy grows. Joe Biden campaigned on a repeal of the 2017 tax cuts. Additionally, the Democratic party, in control of the House, took a clear stance, promoting the “tax the rich slogan”. Therefore, it is difficult to see a scenario where there is no call for capital aimed at the wealthy in the form of increased taxes. 

One of the tax cuts at risk is the estate gifting limit. This amount doubled from $5 million to $11 million per person (adjusted for inflation) in 2017. In 2021 this amount could be reduced drastically. Meaning, couples would not be able to gift $22 million to their children and/or grandchildren tax free anymore. As well, it is important to note, even if congress does not act in 2021 the estate gifting limit automatically reverts to the pre-2017 level in 2026. 

Estate Tax Box

Everything we own is contained in our estate tax box. We pay income taxes on earned income, sales taxes on purchased goods/services, property taxes on real estate, cars and boats, taxes on our investments as they grow, and then the IRS implements a final tax. They build a large toll gate between you and your children and even another toll between you and your grandchildren. Fortunately, the IRS allows you to make transfers out of that box via annual gift exclusions. There is an annual $15,000 gift anyone, and an $11.5M lifetime exemption. The lifetime exemption can be used as a gift during lifetime or as an exemption for your estate upon death. After those amounts the balance is taxed at 40% at the federal level. Then, you have to add your state’s toll. This can bring the charge up to 56%. With all of this in mind, the goal of effective estate planning is to transfer assets and future appreciation out of the estate tax box, and employ hedge strategies to minimize taxes.

Vision, Model, Plan, Implement

The key to successfully transferring wealth to your children and their children begins with a vision. We have to lay out what you want for your children, grandchildren and future generations. It could be for your family to continue to gather at a cherished vacation home, work together as stewards of family capital for charitable works, social impact investing, or provide an opportunity fund to invest in your children. The possibilities are endless, but it all begins with vision. Then, the objective is to take the parent’s vision and build a model of current and future financial statements. The model then allows us to create a plan of how to maximize outcomes. 


The starting point with model building is distinguishing between “core” and “excess” capital requirements. Core requirements relate to lifestyle spending and capital reserves, in other words, your current needs. Excess capital is that which is to be transferred to future generations and provide for charity. This is what is taxed at the estate tax rate. 

Once you calculate your core capital (the amount you and your spouse need for the rest of your life), you can determine if you have any excess capital. The excess is the amount remaining after you die and it can go to only three places: family, charity, and the IRS. If your goal is to maximize family and charity and minimize tax payments, there are some specialized strategies that allow for maximum transfer to your desired recipients and minimize or get you to a zero-estate tax plan. 

Low interest rates offer an opportunity

Today’s historically low interest rates make estate planning techniques more effective. For example, family loans and installment sales of family LLCs (“FLLCs”) to defective trusts and GRATs (grantor retained annuity trusts) are far more efficient in the low interest environment. 

In the case of family loans and transfers, the interest rates used as reference are the Applicable Federal Rates (“AFRs”). AFRs, published by the IRS, are used to determine the original issue discount, unstated interest, gift tax, and income tax consequences of below-market loans at the time when the lender initially makes the loan. The set of AFRs for transactions initiated in June 2020 are 0.43% for the midterm bracket (9 years) and 1.01% for the long term bracket (30 years). These are historically low rates. Meaning, now is the best time to transfer wealth through family loans or installment sales to defective trusts. There have never been hurdle rates this low for effective gift leverage.

Potential Example

Even if you and your spouse have already given away all you can based on your lifetime exemption, you can loan cash to a Dynasty trust. The loan would be for 30 years with 1.01% annual interest and a balloon payment at the end of the loan. The trust can then invest the asset. All of the asset’s appreciation above 1.01% is a gift and estate tax free transfer to your heirs. So, a loan of $5M invested that earns a 6% return can produce net over $19 Million for your heirs after the trust pays back the $5M loan. That is a $19M transfer to your family that you are able to write Uncle Sam out of your will. Yet, it can be worth even more if you set this up as a Intentionally Defective Grantor Trust (“IDGT”). This just means the parents can be the income tax payer on the trust’s growth which is an additional gift and estate tax transfer.

Asset appreciation

Many assets have lost value since the crisis. The implication is that their valuation if transferred outside of your taxable estate is lower, and the recovery of asset prices taking place will not be subject to estate or gift taxes.

For instance, donating assets that you believe will appreciate in value to Intentionally Defective Grantor Trusts (IDGT) ensures that your heirs benefit from the gift plus future growth as the assets appreciate outside of the taxable estate. The donation qualifies for your exclusion and lifetime exemption, and you have the option of paying taxes on the growth of the trust.  

How to Retain Control

A lot of people are reluctant to plan for their estate while they are alive because they do not want to give up control over assets. Also, concern about what would happen if they were to need the funds in the future is a legitimate fear. Family LLCs solve the problem. By transferring assets to the LLC, you can retain the managing interest and have 100% control as CEO over all its resources. Then, you can gift the economic interest of the LLC to a trust using your annual exclusion and lifetime exemption or sell it taking advantage of the ultra-low AFR for the benefit of your heirs.

Another option is Spousal Lifetime Access Trust (SLAT). As the grantor, you can make your spouse a beneficiary of an irrevocable trust and allow them to have access to all the income the trust earns, and even the principal if they need it. In other words, the SLAT removes assets from an individual’s estate but transfers the assets to an irrevocable trust for the benefit of the spouse. This allows the individual to take advantage of the increased estate tax exemption, while still retaining a degree of control over those assets via their spouse during their lifetime. After the death of the spouse the trust balance is available for other beneficiaries not the government, since it’s outside your estate tax box.

Life Insurance

Life insurance can be a trust asset class in and of itself: it provides liquidity to offset the estate tax and avoids the liquidation of assets to pay the IRS in 9 months. It seems as though the estate for Prince, the famed musician, paid half of his estimated net worth to the IRS. Since its unlikely he had a couple hundred million just sitting in the bank, in order to pay the IRS the estate may have needed to sell at a discount if his assets needed to be liquidated to pay this bill? 

Instead, the premium of a life insurance policy can offset a portion or all of the estate tax. This greatly enhances the capital left to the heirs and avoids the need to sell assets to gain the cash needed to pay the IRS. Even if you have enough estate liquidity, a trust owned life insurance policy can provide a guaranteed, non-correlated, income-tax free return. The IRR at life expectancy all the way to age 100 or 120 can be a very attractive fixed income alternative for a trust portfolio. There is even a way to turbocharge this option, parents can buy a survivorship life, commonly called a “second to die” policy. The insurance charges are based on the joint life expectancy of a couple, which can be up to 30% lower. The policy can be owned by a trust, and the parents can loan the trust the premium each year. At the end of the funding period the trust can pay back the loan to the parents with assets that have had time to appreciate. It is possible to set up a trust with $100 million of guaranteed life insurance with negligible gift tax impact.

The gatekeepers of your wealth

At M3 Family Office we strive to be the long-term gatekeepers of your wealth. Wealth management is all about having financial control. Our objective is to safeguard our clients’ interests thanks to timely planning of wealth transfers and asset protection. Our dedication to the stewardship of your assets, both for today and for tomorrow, extends to your heirs as well.   


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