Estate Planning in a Volatile Market

Our country now faces unprecedented challenges. As your trusted advisors, we wish you and your family health and comfort as we weather this storm together. Although estate planning may not currently be at the top of your mind, we wanted to reach out to let you know that a down market and low interest rates can present opportunities that may not be available when our lives return to normal.

First, the benefits of lifetime gifting can often be maximized when the stock market turns against us. In 2020, taxpayers can gift up to $15,000 to an unlimited number of recipients ($30,000 for married couples who split gifts) without a gift tax. In addition to this annual exclusion, taxpayers may gift up to $11.58 million ($23.16 million for couples) during their lifetimes free of tax. Gifting makes sense when the stock market falls because more shares can be given away without exceeding these thresholds. When the market improves, and the gifted shares rise in value, none of this appreciation will be included in your taxable estate.

Second, now might be a great time to consider the benefits of a grantor retained annuity trust, known in the estate planning world as a “GRAT.” A GRAT is a mechanism whereby a taxpayer transfers assets to an irrevocable trust and retains the right to receive annuity payments for a predetermined period of time. When the GRAT term ends, the trust assets, and any appreciation in value of such assets, are passed to the beneficiaries free of taxes. GRATs established in hard times are generally sensible because the hurdle growth rate required to be surpassed in order to successfully transfer appreciation is much lower than in times of higher interest rates. The more that the stock market rebounds during the GRAT term, the more tax-free appreciation is passed from your estate to your loved ones.

Today’s environment also lends itself to the possibility of refinancing existing intra-family loans at lower rates. It may also be possible to use “swap powers” in irrevocable trusts to exchange low-basis assets owned by the trusts for high-basis assets owned individually. This will maximize the step-up in basis allowed at death and thus minimize the capital gains taxes paid by your beneficiaries when they later sell the assets.

If any of these techniques are of interest to you, we encourage you act before this window of opportunity closes. Many experts believe that the fundamentals of our economy are strong and that our markets will quickly rebound once this health crisis is behind us. In addition, the political winds may shift following the upcoming election, and several of the planning tools described in this article have been on the chopping block for quite some time. Please feel free to reach out to us to discuss which planning opportunities may work best for you and your family.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2022 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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