Year-End Planning

Advantageous Tips for 2020 Year-End Planning

At the time of this article, and in an ever-changing climate, the Biden-Harris administration is projected to take over in January 2021.  The Democrats will hold control of the House (at smaller margins than before) and the Senate control is pending January run-off elections in the state of Georgia.

COVID-19 cases continue to rise throughout the country, risking additional lockdowns and imperiling the economy.  The level of Federal deficits caused by the pandemic may mean some adverse changes in the nation’s tax laws could be enacted as early as the beginning of next year.

However, despite all of these grim reports and on-going uncertainties, some positive news is that there are many opportunities available to accomplish significant wealth transfers before year end. The intersection of historically low interest rates, artificially depressed asset values and very high federal estate and gift tax exclusion rates ($11.58 million per taxpayer) make now the perfect time to plan.

This article is intended to outline some last-minute strategies for this unique planning environment.

Tried and True: The Spousal Lifetime Access Trust

Spousal Lifetime Access Trusts (“SLATs”) can be a useful tool in late 2020 planning to use exemption and preserve access.   In a SLAT, the Settlor (the trustmaker) is not a beneficiary of the trust but instead, the Settlor’s spouse is a beneficiary. This trust structure affords a greater level of financial access to trust assets than a trust for the benefit of descendants for which neither the Settlor nor the Settlor’s spouse are beneficiaries, with low risk of estate inclusion and reach by creditors.

The assets put in the trust should belong to the Settlor only and not be jointly owned by the spouses.  Transfers to SLATs are designed to use up lifetime exemption and can be structured to achieve benefits for future generations of the family.

Additionally, there may be an opportunity for both spouses to create a SLAT, benefiting the other spouse, so long as each trust is sufficiently different with different terms so that the transactions are not collapsed by the reciprocal trust doctrine, which posits that if Person A creates a trust for B, and Person B creates an identical trust for A, the trusts can be “uncrossed” as though each person created a trust for his/her own benefit.

This wealth transfer strategy may be used for a wide range of families who want to use lifetime exemption before year-end, obtain asset protection and preserve access.

Intra-Family Lending

There are even some planning opportunities for the most reluctant of clients who do not have any appetite for making additional wealth transfers before year-end.

The current historically low interest rates have created opportunities for some individuals to substitute a lower interest note in place of an older high interest note. For example, a parent sold assets to a trust several years ago in September 2015 and the required interest rate was 2.64%.  If a new note at the new rate of 1.31% could be substituted for the old note at the old rate, a substantial reduction in the interest payments owed by the trust back to the parent could be achieved, thereby limiting the value of the parent’s estate.  Such a refinance could improve cash flow for the trust and enable the family to make additional sales of assets to the trust.

Downstream Planning Using Notes

A valuable “asset” of many ultra high-net-worth families is the unused exemption of their children. In those cases where the adult children do not have sufficient resources to make gifts to use their exemptions, the older generation (G1) may need to move assets to the younger generation (G2) so that G2 can take advantage of their remaining lifetime exemption, particularly before year-end.

By making a long-term loan using an interest rate that matches the long-term applicable federal rate (the “AFR”), G1 can transfer cash to G2 without making a taxable gift.  The current long-term AFR is 1.31% for loans with a term of 10 years or more.  For context, the annual interest due on a loan of $1 million with a 1.31% interest rate would only be $13,100.

If the intention is for G2 to make gifts upon receipt of funds borrowed from G1 in order to use up G2’s lifetime exemption, perhaps the Note may be secured by an existing dynasty trust that had been previously set up by G1 for the benefit of G2.  G2 should provide a financial statement or other documentation that demonstrates that G2 can continue to make the payments due on the Note after any gift transfers by G2.

In the short time that is remaining before the end of the year, the taxpayers should seek to space out the transactions as much as possible in order to ensure that the loan from G1 to G2 is discreet from any gifts made by G2.  Additionally, the gifts by G2 should be of an amount that is different than the dollar amount that is borrowed from G1 in order to avoid implicating the step transaction doctrine, which would allow the Service to disregard the loan and treat the gifts as having been made from G1 and not G2.

In all cases, it is important for the parties to follow economic formalities in order to avoid government scrutiny and a possible recharacterization of the loan as a gift.  The loan should be memorialized in a Promissory Note instrument.  Both parties should sign it, possibly in the presence of a Notary Public, if available.  Payments should be made in accordance with the Note instrument and there should be economic consequences if payments are not made timely, such as a late payment penalty.


Even in the rush to plan before year-end, it’s important to take a step back and define your objectives so that the plan can be tailored to achieve those goals.  For some people, using up the $11.58 million lifetime exemption is key, while for others, achieving asset protection is the most important goal.  There are some other individuals who have already made substantial gifts and may just want to modernize their plans given some of the opportunities available under current law.  Planning is a process, and no one should take a one-size fits all approach.

About the Author

Joy E. Matak


Joy Matak, JD, LLM is a Partner at Sax and Co-Leader of the firm’s Trusts and Estates Practice. She has more than 20 years of diversified experience as a wealth transfer strategist with an extensive background in recommending and implementing advantageous tax strategies for multi-generational wealth families, owners of closely-held businesses, and high-net-worth individuals including complex trust and estate planning.  She can be reached at [email protected].

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