To say 2020 has been a challenging year is surely an understatement, and we are only halfway through! The combined impact of the global coronavirus pandemic and widespread social upheaval has been momentous. Understandably, for many, investing and financial matters have taken a backseat to current events. If you do find time to think about your planning, here are a number of opportunities you might find compelling.
It may be a while before we know the full cost of the coronavirus relief packages, but thus far the estimated total cost of the four separate packages is $3 trillion.1 That’s Trillion with a “T!” By comparison, the 2009 stimulus package had a cost of $831 billion. To put that in further perspective, 2019 federal revenues totaled $3.5 trillion. The CARES package alone (just one of the four packages passed) will consume nearly all of those revenues.
Even before the pandemic hit, the Congressional Budget Office (CBO) was projecting a budget deficit of approximately $1 trillion for the fiscal year. Partisanship aside, you have to be left wondering, “How will we pay for all of this?” Federal revenues come from three main sources: personal income taxes, payroll taxes, and corporate income taxes. Unless Congress develops an appetite for massive government spending cuts in future budget years, it isn’t unreasonable to believe that federal tax rates on income may increase in the coming years.
The applicable federal rate (AFR) is the minimum interest rate that the IRS allows for private loans (as opposed to bank-funded loans). The AFR rates for June 2020 are at historic lows: short-term loans–0.18%; mid-term loans–0.43%; long-term loans–1.01%. See chart below for recent history.2
The Section 7520 Rate is used to discount the value of annuities, life estates, and remainders to present value. Named after the section of the IRS Code that defines it, this rate is based on the AFR rate. Therefore, it follows that when the AFR is at an all-time low so, too, is the Section 7520 rate. For the month of June 2020, the Section 7520 Rate is 0.8%.3
The strategies mentioned in this article are not intended for everyone and this is not intended to be a comprehensive list. If you would like to learn more about how any of these strategies may be applied to your specific situation, please give us a call. As always, please seek advice from your accountant or estate planning attorney before taking any action on these ideas.