Redrick Terry:
It is now time for 4 Your Money. We’re joined by James Nelson, of NelsonCorp Wealth Management. James, welcome back.
James Nelson:
Thanks, Redrick. Good to see you.
Redrick Terry:
Good to see you as well. We talk a lot about taxes on the show. Some of the events of 2020 have created a very specific set of opportunities. So, if you could, just share with us what you guys are thinking.
James Nelson:
Yeah, there’s a lot that’s happened in 2020. One of the biggest items from our perspective is the large drop in interest rates. We talk about how interest rates affect investments, but they’ve actually presented a pretty nice income and estate planning opportunity for this year.
James Nelson:
I think we have a chart coming up that illustrates that and offers a little bit of perspective. Dating back to the early nineties, you can see here on the chart, the midterm applicable fed rate is what we’re talking about here, was right around 7%. Fast forward to 2019, and that was right around 3%. Now, today, we’re at historical low levels of 0.35%. That’s unheard of and, again, just historically low rates.
James Nelson:
This is important because this is the number that the IRS uses when they calculate loans and trusts, so this does present a pretty nice opportunity for some planning purposes.
Redrick Terry:
Share with us some of those strategies you talked about.
James Nelson:
Yeah. So, on the estate planning front, the federal exemption for an individual is $11 million. So, they can pass away with $11 million or less and not have to pay any federal state tax for a couple that’s $22 million. That’s about to change. It may change sooner than people think.
James Nelson:
In 2026, that’s supposed to revert back to the old limits, which is 5 million for an individual and 10 million for a couple. But depending on what happens in November, that could happen a lot sooner.
James Nelson:
For the folks on the Illinois side of the river, they also have to worry about Illinois inheritance tax at a state level. So, a few of the ideas that come up are family loans. Family loans are very attractive right now. We’ve done a lot of them and talk a lot with clients about them recently. This allows maybe parents to gift money to, or not necessarily a gift, but loan money to children at this very low rate of 0.35%, and then it’s a three to nine year period of time where that loan’s out there, and then the money eventually gets paid back.
James Nelson:
The other big item is charitable lead annuity trust. This allows a donor to make a donation to a charity of their choice. And again, that three to nine year period that the money eventually comes back to the donor, but the charity gets to keep the cash from the gains on that money. So, those are two big items, right now.
Redrick Terry:
I’m running low on time here, but who should be thinking about looking further into that type of planning?
James Nelson:
Yeah. So, if you’re in a high income tax bracket or a high income tax state like Iowa, these family loans can really come into play. Especially if you’re already gifting money to two children, they should really be looking at making these loans instead, probably, going forward for the foreseeable future.
James Nelson:
And then, the charitable lead annuity trust is another really good option for people. If you’re already gifting a fair amount of money to a specific charity, definitely look at the charitable lead trust.
Redrick Terry:
All right. James, as always, we thank you for joining us.
James Nelson:
Yeah, thank you, Redrick.
Redrick Terry:
And if you missed any part of our discussion, we’ll make it available to you at ourquadcities.com.