While recent market volatility has been unsettling for many investors, the depressed value of many assets, coupled with very low interest rates, present an opportunity for families to revisit their wealth transfer plans and gifting strategies.
Specifically, the following five planning ideas can be considered in this environment:
- Take Advantage of Low Interest Loans. One of the simplest ways to take advantage of low interest rates as part of your wealth transfer strategy is to make loans to family members or refinance existing loans to family members or trusts. Often, wealthier family members lend money to other family members or trusts to help start a business or fund investment opportunities, and those loans carry interest at the current rate. The current interest rates make this a prime time to revisit those loans, as payments will likely be reduced and the wealth transfer benefit will be larger.
These loans can be structured as interest-only with a balloon payment upon maturity so that the growth of the asset is more likely to compound and appreciate at a higher rate than the minimal interest charge. Such additional growth would essentially act as a tax-free gift to the borrower.
- Revisit Irrevocable Trust Planning. If you have not yet set up an irrevocable trust, the substantial lifetime gift exemption and current depressed asset values make this an excellent time to consider doing so. Many irrevocable trusts are initially funded with a gift to the trust. During a period of depressed valuations, such as what many investors are experiencing currently, trust creators could use less of their lifetime gift exemption (currently $11.58 million per taxpayer) to establish a trust. This can provide a significant benefit, as the growth of those assets are sheltered from future estate tax (currently 40%).
- Create a GRAT. For those who have used their exemption or are looking to give away the future growth of an asset, the current market also provides a beneficial time to create Grantor Retained Annuity Trusts (GRATs). If structured correctly, a GRAT can provide a low-risk way to transfer wealth without triggering a taxable gift. The trust creator receives annual payments equal to the value of the initial gift plus a small interest charge, which is tied to current interest rates. The real benefit stems from the spread between the rebound in value that is expected to occur and the low interest charge, which can pass to beneficiaries when the GRAT terminates.
- Create a CLAT. For those who are charitably inclined, another opportunity is to fund a Charitable Lead Annuity Trust (CLAT). A CLAT operates similarly to a GRAT, but distributions during the term of the trust pass to a charity rather than back to the creator of the trust. A CLAT may provide a charitable income tax deduction in the year the trust is formed to the trust creator, or it can offset trust income during the term of the trust. Once again, CLATs can be structured to avoid causing a taxable gift. When the trust terminates, the appreciation of the assets in excess of the low interest charge are distributed to beneficiaries.
- Further Discounting Assets for Gifting. One of the common themes to the planning opportunities above is that the benefit increases when the value of the asset at the time of transfer is low. Whether the asset is an investment portfolio, real estate or direct investment, re-structuring the way an asset is held may provide an opportunity to discount the asset even further for wealth transfer purposes. It is important to note that the entity being transferred has to be valued by an appraiser in order to justify an additional deduction. Depending on the rights retained and the size of the position, valuation experts mayThe ability to discount assets is worth considering as part of a wealth transfer plan.
Because many assets have recently experienced a significant loss of value as a result of market volatility, there may be an opportunity to capitalize on those losses and to help maximize future growth in one or more of the strategies described above. When combined with low interest rates, the spread between currently depressed values and the potential long-term benefit to beneficiaries could be significant.