By JULIA S. WEAVER, J.D., LL.M., Chief Wealth Planning Officer & Family Office Fellow and KARA J. TALBOTT, CPA/PFS, CFP®, Senior Wealth Strategist & Family Office Fellow

At times, the extremes of a negative event are matched by the extremes of a positive planning opportunity, and such is the case with our current market, economic and tax law environment. While 2020 has been a year of unprecedented set-backs, in the world of estate planning we have the veritable trifecta of positive planning opportunities: historically low interest rates; suppressed asset valuations as a result of market and economic influences; and a variety of favorable laws and authority for ‘estate freezing’ strategies.

In this three part series, we will first discuss the scope of the current planning opportunity and the ‘why’ behind it. In our second and third articles, we will dive deeper into the specific strategies that we believe provide optimal results in the current environment, both for overall federal estate tax planning and for charitable planning strategies.

The Estate Freeze
Broadly speaking, estate freezing strategies are designed to freeze the taxable value of an asset in the grantor’s estate. All future appreciation after the strategy is implemented goes either into a trust for intended remainder beneficiaries or directly to the beneficiary outright. The former strategy, utilizing a trust, is generally preferred for its superior asset protection benefits, as well as the opportunity to design a trust for ongoing multi-generational tax benefits.

The specific strategies by which to accomplish an estate freeze are numerous and each strategy has inherent pros and cons. However, in terms of the foundational requirements and factors that lead to optimal success, there are several ‘absolutes’ for each strategy.

Absolute One – Each Family’s Strategy Has a Unique Fingerprint
As most affluent families are aware, the current Gift/Estate and Generation Skipping Tax exemptions for 2020 are $11,580,000. All wealth in excess of this exemption amount is, at some point, taxed at the rate of 40%. For many affluent families, it is imperative to be as strategic as possible to get the maximum benefit of these lifetime exemptions.

Poorly planned gifts and non-strategic use of the exemptions can result in reverse estate planning, where wealth that was successfully transitioned out of the grantor’s taxable estate gets shifted back onto the grantor’s balance sheet. To avoid this result, practitioners are challenged to find the most optimal strategies to maximize the use of the exemption in a thoughtful and tailored way for each and every family.

Absolute Two – Hurdle Rates
Many estate freezing strategies require a certain amount of income to be paid back to the grantor over the course of the planning technique. The amount to be paid back to the grantor is referred to as a hurdle rate and is dictated by the IRS for each particular strategy.

There are two main ways to construct a freezing strategy:

  1. Utilizing gifting techniques
  2. Utilizing sale strategies

For gifting techniques (other than a simple outright gift), the required payments back to the grantor are defined as annuity payments and the hurdle rate is based upon the IRS published Section 7520 rate. For a sale strategy, the IRS requires that the interest payments back to the grantor must be, at a minimum, the published Applicable Federal Rates, or AFRs.

Recalling that the goal of a freezing strategy is to minimize the amount of wealth that must be poured back into the grantor’s taxable estate, low interest rates provide the ideal environment to maximize the positive impact of these strategies. In fact, there is a 100% correlation between declining interest rates and an increase in the success of a freezing strategy.

For June 2020, the hurdle rate for an annuity-based strategy is 0.6%. All appreciation over and above this historically low rate accrues to the benefit of the grantor’s heirs or other trust beneficiaries. A 9-year interest-only balloon note, resulting from a sale-based strategy, would require a minimum AFR of only 0.43%.

In other words, the required income/wealth to be paid back into the grantor’s taxable estate is at an all-time historical low under either scenario.

Absolute Three – Passing Muster with the IRS
Many techniques are directly governed by statutory authority within the Internal Revenue Code. Currently, our laws are extremely favorable to several strategies, as will be further discussed in this series. These strategies, however, are vulnerable to political whim and potential changes in our Internal Revenue Code in the coming months.

One of the more publicized pending changes to our tax laws includes the December 2025 sunset of the currently increased federal estate tax exemption, although the increased exemption could be reduced by earlier legislative action.

In addition, the statutory authority supporting many estate freezing strategies is also subject to legislative challenge. While the ‘practitioner’s toolbox’ is currently full of favorable laws and legislation, many challenges to these strategies have been the subject of political platforms going into the coming 2020 elections.

Absolute Four – A Freeze is Ideal for ‘Appreciating’ Assets
The greater the appreciation of the asset after the strategy is implemented, the greater the positive impact. It is the appreciation that a freezing strategy is designed to protect from the 40% gift/estate tax. The earlier these strategies are implemented, ahead of a full valuation rebound, the greater the positive impact.

As such, when an asset value is suppressed by a variety of macro- or micro-economic influences, we believe this presents an optimal time to implement a freezing strategy. It is no coincidence we are discussing this issue at a time when broad market values have not fully rebounded to their highs earlier in the year. Further, many business owners may find the impact of COVID-19 on their business will result in a suppressed valuation in the months and quarters that lay ahead.

Herein lies the intersection of the world of estate planning with the world of investment management. Collaboration is a necessity in order to determine the optimal time to implement a freezing strategy. It is an ideal time to speak with your planning and investment management teams to glean when this type of strategy is most suitable for your family.

Engaging Your Planning Team
As values experience a rebound, our Oxford team is positioned to ensure that our affluent families retain the value of their rebound appreciation, rather than sharing it in a 60/40 split with the Internal Revenue Service (IRS). Consultation with your Oxford team and a full analysis of the pros and cons of each potential strategy will allow your full team of advisors to identify the optimal solution for your family.

In the upcoming articles in this series, we will discuss the techniques and tangible means by which you and your Oxford team can partake of these extremely positive planning opportunities.


The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. The opinions expressed are those of Oxford Financial Group, Ltd. The opinions are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Oxford Financial Group, Ltd. is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Carmel, Indiana. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call 800.722.2289 or contact us at OFG-20-11