Wealth Transfer Strategies to Consider to Protect Your Assets from Coronavirus-Related Market Troubles
By: Barry E. Haimo, Esq.
April 23, 2020
COVID-19, or the novel coronavirus, has thrown the global market into disarray. This places many challenges in the path of those who want to protect their assets.
However, the current historically low interest rates and depressed asset values do provide options. If you have assets that you intend for certain beneficiaries, there is a unique opportunity to transfer them at a minimal cost.
Grantor Retained Annuity Trusts
A Grantor Retained Annuity Trust (a “GRAT”) can help you transfer funds to your beneficiaries without facing estate taxes. GRATs tax the value of the assets put into the trust up front. With the current depressed market values of many assets, this tax burden is the lowest it has been in years.
Furthermore, they give you the right to receive an annuity stream from the trust for a predetermined number of years. Over the course of those years, the grantor (you) will receive an annuity from the trust according to the rate the IRS sets. Currently, the rate is only 1.2%, so the majority of the funds remain in the trust.
At the end of the trust’s lifetime, if the grantor remains alive, the rest of the funds go to the trust’s beneficiaries tax-free. For example, you might put $1,000,000 in stocks in a 10-year GRAT today, and in 10 years those stocks could easily be worth $2,000,000 after your annuities have been paid. That extra million dollars in value would be passed to your beneficiaries directly, without an estate or gift tax.
Charitable Lead Annuity Trusts
Like a GRAT, a Charitable Lead Annuity Trust (a “CLAT”) allows you to transfer funds to a beneficiary without facing gift taxes. However, instead of receiving the annuity yourself, you designate a charity as the annuity recipient.
Your preferred beneficiary still receives the balance of the trust at the end of a set term of years. And the current depressed asset values and low interest rates will help both your beneficiaries and your chosen charity get the most out of the CLAT.
Low interest rates make simpler wealth transfer strategies remarkably effective as well. For example, a common wealth transfer is from one generation of a family to the next. In the current atmosphere, you can perform effective intra-family transfers such as loans or selling assets to younger family members. These types of transfers are most effective in low-interest environments because it allows the asset appreciation to outstrip the interest charged. This additional appreciation then escapes gift or estate taxes.
Furthermore, the taxable value of your assets will no longer appreciate. Instead, it protects your assets at the fair market value purchase price. This is currently much lower than average for most assets, making it a prime opportunity to transfer assets to younger generations.
In the current market climate, these three strategies might be particularly helpful to many. However, there are many other wealth transfer strategies to consider when setting up your estate plan. If you would like to learn more, don’t hesitate to get in touch today.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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