OCEAN CITY – While there is never a wrong time to revisit your estate plan with your attorney, two aspects of the current economic environment may provide an especially good opportunity to launch new trusts or structured charitable giving.
In our view, today’s very low interest rates are advantageous for some estate planning vehicles, and if you’re thinking about transferring securities or real estate to your heirs, the fact that such assets have probably lost value — an otherwise painful reality — could be an advantage here, translating into potential savings on gift and estate taxes.
Beneficiaries of several kinds of trusts stand to gain if the assets they inherit outperform an IRS-stipulated interest rate — and that’s likely to happen for trusts built around today’s rates, which remain near historic lows, according to Scott Cooper, Managing Director of Merrill Lynch’s Wealth Structuring Group. Consider a grantor-retained annuity trust, or GRAT. With a GRAT, a donor transfers assets to the trust, then receives annuity payments for a specified term of at least two years. At the end of that term, the remaining assets, if any, go to the trust’s beneficiaries. And although that transfer is a taxable gift, its value is determined when the trust is established, according to a hypothetical (or estimated) projection that assumes the assets will grow at the IRS-specified interest rate and that subtracts the value of the annuity payments. If the trust is set up so that the payments equal the initial principal amount plus IRS-mandated interest, no gift tax will be due. Yet if assets actually appreciate at a rate that exceeds the low IRS rate, the heirs will receive a gift tax-free sum.
Current low interest rates can also be locked in with strategies that can effectively transfer very long-term assets. For instance, a dynasty grantor trust — which can last for several generations — could buy your business or real estate by issuing an interest-bearing promissory note. Once again, if the assets in the trust generate a total return greater than the interest the trust pays you, the difference can accumulate and pass to your heirs free of transfer taxes.
The same principle could apply to philanthropic giving in the case of a charitable lead trust. A lead trust pays an annuity just as the GRAT does, but the payments, based on the IRS-stipulated interest rate, go to charity rather than to the trust creator. If the trust’s assets outperform that interest rate, your heirs — who will receive the remainder at the end of the trust term — then reap the difference free of gift and estate taxes. "By transferring assets to a lead trust, you can give to charity yet also have the potential to save some transfer taxes," Cooper says.
In all these cases, the disheartening downturn in stock and real estate values could potentially work to your advantage, says Cooper. If you transfer such assets to a trust or a philanthropic vehicle before prices rebound, you may increase the chance that they will grow at a rate that exceeds the IRS-specified interest rate. And the less an asset is worth when it’s transferred, the less of your $1 million lifetime gift-tax exemption the transfer will consume.
With these opportunities growing out of the current economic environment, this may be a good time to speak with your attorney about your estate plan, to help ensure that your family and favorite causes reap the fullest measure of the assets you intend to pass on to them.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)