Additional Estate Planning Strategies in a Down Market

 

If you are financially able to initiate planning at this time, several estate planning techniques can be utilized in light of the recent stock market correction and depressed economy. If you believe in the long-term growth potential and valuation of equities, then depressed market prices combined with a historically low-interest rate environment may offer planning opportunities.

 

Grantor Retained Annuity Trusts - GRATs

 

A Grantor Retained Annuity Trust (“GRAT”) is an irrevocable trust that pays the Settlor (or “Grantor”) of the Trust an annuity for a fixed term of years (we typically use two year durations). The Grantor can create a GRAT by transferring cash or appreciable assets in trust while retaining an annuity interest. Upon creation of the GRAT, the Grantor determines the amount of the annuity payment. The greater the retained payments the smaller the taxable gift when the GRAT is created. If the Grantor dies before the expiration of the GRAT term, generally all GRAT assets are included in the Grantor’s estate at the current fair market value at date of death and the benefits of the GRAT are not realized. However, if the Grantor survives the term, any property remaining in the GRAT after the last annuity payment, including appreciation, will pass to the remainder beneficiaries (usually the Grantor’s children), without being subject to gift tax. This is a great technique to pass wealth to your children without paying significant gift tax during a low interest rate environment.  If the assets appreciate by more than approximately 2% per year (based upon the IRS rate in existence at the time of the gift), the excess appreciation at the end of the GRAT term can pass to intended beneficiaries free from estate tax.

 

Gifting

 

You can gift up to $15,000 per year (or $30,000 if you and your spouse, if any, elect to split gifts) to any person and to an unlimited number of individuals, without paying gift tax. During a stock market correction, you may leverage these gifts by gifting shares that have decreased in value, but which you expect will recover in later years (i.e., you may make a tax-free gift of shares that have depreciated in value and when the value of such shares rises, they will no longer be part of your taxable estate and the donee will retain the appreciated shares). Larger gifts can be made to your children and grandchildren as well via trust or outright distributions to utilize the current exemption amount of $11.58 million before the existing exemption amount sunsets on January 1, 2026 or earlier based upon the political and financial climate.

 

You can also consider making gifts to a Spousal Lifetime Access Trust (a “SLAT”), which provides a gift to the donor’s spouse and locks in the current $11.58 million exemption. When you combine the reduced values due to the economic downturn with the valuation discounts for gifts of minority interests, now is a great time to make gifts for those who can afford to do so.

 

Leveraged Gifts

 

Gifts can be leveraged by using discounted values of businesses that are currently suffering from the economic downturn.  Closely held businesses typically qualify for discounts for lack of marketability and minority interests.

 

Refinancing Loans

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We recommend that you review any outstanding loans that you may have to members of your family or trusts created for their benefit. If there is no prepayment penalty and you can survive without the cash flow, then, because the applicable federal rate (the “AFR”) is likely to be lower at this time (a loan of more than three years, but no more than nine years only requires 1% interest for loans made in April 2020), you can refinance at the lower rate to reduce the amount of assets in your estate in the future.