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Estate Planning in Crisis of COVID & Recession

  • By:Riddle and Butts

Estate planning is challenging enough in regular times. But when you introduce the dual specters of COVID and recession, it becomes even more difficult. 


Naturally, people think more carefully about passing their assets onto others in times like these. Not only might the recession cut the value of an estate, but coronavirus could also end life early, releasing assets to beneficiaries sooner than expected. 


What Is Estate Planning?

Estate planning is the process of figuring out who will get what when you die. Your estate is the sum of all the assets you own and want to pass on, including your home, vehicles, investments, personal items, and debts. An executor takes over the management of your estate when you die and carries out your will, under the law. As the owner of your estate, you get to decide who will benefit, and in what proportions, before you pass on. 


What Documents Do You Need For Estate Planning? 

Estate planning is a tightly-regulated legal process, designed to prevent fraud, mishaps, and arguments between beneficiaries after you die. 


For that reason, you need several planning documents, ready to spring into action following your death (or diagnosis with an illness that takes away your ability to make decisions). These include: 

  • Your will or trust
  • A durable power of attorney
  • A healthcare power of attorney
  • A living will and healthcare directives
  • HIPAA authorization 
  • Guardianship designation for those who have children


The Challenges And Opportunities Of Estate Planning In A COVID- And Recession-Ravaged World

Estate planning is a challenge right now. But as you will read, there are also opportunities. Here, we discuss them in detail.


Social Distancing

When lawmakers developed estate planning rules, they assumed that we would forever live in a world where people could come into proximity with each other. Wills, for instance, required witnesses to be physically present during the signing of relevant documents for them to be legally valid.


Unfortunately, given current shelter-in-place and stay-at-home orders, it is not safe to continue with those practices. Vulnerable people – those most in need of estate planning – are often the most susceptible to COVID-19.


Governors in a variety of states have signed emergency notarization orders, permitting the witnessing of wills, will amendments, trusts, and trust amendments using audio-visual conferencing tools. Currently, authorities advise you to sign documents in front of two witnesses who are not beneficiaries or members of your family. Having a will validated in court is much easier when your witnesses are independent third parties without any vested interests. 


Low-Interest Rates


The COVID recession is also driving interest rates down. Central banks are creating money and using new dollars to prop up the stock market, financial sector, and the bank balances of private citizens in the hope of staving off another great depression. 


Low-interest rates are sometimes a drag on wealth but also an opportunity to make changes to your estate to financially benefit your beneficiaries. Current advice includes: 

  • Establishing a Grantor Retained Annuity Trust (GRAT) to maximize on large financial gifts to family members
  • Selling assets to an Intentionally Defective Grantor Trust (IDGT) to ensure that they continue paying income tax but avoid any estate-tax (since the law still qualifies them as income)
  • Lending funds to beneficiaries or to trusts from which they may benefit in the future
  • Refinancing loans to beneficiaries


Typically, estate planners use these tools to reduce the total tax burden on their beneficiaries when they take possession of the deceased assets. Low-interest rates are making many of these options more compelling since asset appreciation is lower than it has been historically. 


GST And Federal Gift Exemptions Considerations

Recent COVID-induced falls in asset prices may have substantially reduced the value of your investment portfolio. Now, therefore, may be an opportunity for you to gift assets to your beneficiaries under GST and federal gift rules, particularly if you expect asset values to recover soon. The current tax-free exemptions apply to the first $11.58 million for singles and $23.16 million for married couples. You may also want to use a spousal lifetime trust that allows the non-donor spouse to continue accessing trust funds when you’re gone. 


Charitable Giving Considerations

In 2020, there is no limit on tax-free charitable giving exemptions, so you may wish to amend your will to reflect this new reality. (This stipulation does not apply to donor-advised funds or support organizations). 


Bankruptcy Considerations

Given current economic conditions, we are likely to see a surge in bankruptcies across the country. 


If the deceased is declared bankrupt, it may not affect the value of their estate, as long as they have not accumulated any further debts since the date of bankruptcy. However, if they have ongoing or new obligations, they must be paid first before the executor distributes their assets. 


If a beneficiary is declared bankrupt, that can indeed affect the amount of money they receive. Here, the timing of the inheritance is essential. A bankruptcy trustee may not claim a Chapter 7 beneficiary’s inheritance if they received it more than 180 days (around six months) after filing. (For Chapter 13, there may be no delay whatsoever).


Please be aware, though, that the critical date is the date of death of the owner of the estate named in the will in considering whether an inheritance should pass to the bankruptcy estate. It is not the date at which the debtor takes ownership of the inheritance. 


Thus, whether a beneficiary must use the inheritance to pay off your debts under bankruptcy clauses depends almost entirely on timing. If the estate owner dies within 180 days of the beneficiary filing for bankruptcy, then the bankruptcy estate becomes the new beneficiary and sells assets to the point where the debtor pays off all their debts. Whatever assets remain are then distributed by the executor to the beneficiaries, including any bankrupt parties. 


Current economic conditions, therefore, should feature strongly in your estate plan. If you are a debtor, you may wish to convert from a Chapter 13 to a Chapter 7 filing.

Posted in: Estate Planning