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Economy presents opportunities for estate planning, P.2

In our previous post, we looked at how the presently volatile stock market, along with the increased gift tax exemption, has given holders of private stock the incentive to give the stock away as gifts. Here we will look at two further suggestions for family estate planning brought about by the present state of the economy.

One estate planning tool that is currently a good option due to low interest rates is a grantor retained annuity trust (GRAT). A GRAT is a trust in which assets are placed, but from which the grantor retains the right to annuitized payments for a certain period of time. GRAT’s work more efficiently with low interest rates, which is what we have now. GRATs are a good way for families to decrease the size of their estate.

When a grantor sets up a GRAT, they are really gifting future appreciation of the asset without incurring any gift tax. Although the gift tax exemption is currently at $5 million, many individuals who set up GRATs wish to give away more than that. A GRAT can be as short as two years.

Assets placed in a GRAT need to appreciate at a rate greater than the “hurdle rate” established by the IRS. That rate is currently at 2.2 percent per year. In terms of stocks, that does pose some limitations, though there are a number of stocks yielding more than that.

Many individuals place assets in GRATs which are expected to appreciate. In the event an asset continues to fall in value, the assets either go back to the original owner, or the owner is able to purchase back the assets placed in the GRAT and transfer them to a new GRAT. From an estate planning perspective, there is no risk.

A third option for family estate planning which is enhanced by the current market is the ability to make an intrafamily loan that will fund an investment. This takes advantage of both low interest rates and low stock prices. A family could, for instance loan money to a trust for the benefit of the children so that they can purchase stock, real estate, or another depressed asset.

As with any estate planning technique, it is important to work with an experienced attorney who understands your goals and situation.

Source: Wall Street Journal, “How Volatility Eases Estate Planning,” Kelly Greene, August 20, 2011.