If you have an estate that may be subject to estate tax next year, particularly if the November election results in a greatly reduced federal estate tax exemption in 2021, now is the time to remove assets from your taxable estate if you can comfortably afford to do so. One of the most effective ways to do this is to sell assets in exchange for a very low interest promissory note.
We are currently experiencing historically low interest rates and, at the same time, many asset classes are undervalued. This creates “the perfect storm” for tax-free wealth transfers. This month, the long term Applicable Federal Rate, which is the minimum rate of interest that must be charged on inter-family loans with a term of 5 years or more, is only 1.0%. This means that you can sell a currently undervalued asset to a younger family member in exchange for a long-term promissory note with an annual 1% interest rate. By locking in this historically low interest rate for a period of years (e.g., 15 or more), you will have made a gift-and-estate-tax-free transfer to the younger generation of all future income generated by that asset and all future appreciation in excess of 1% per year.