Market volatility may be tough on the nerves, but it could be a boon for wealthy families looking to shelter assets from taxes while helping their children.
Watching the market nowadays is hardly a soothing pastime. It seems that once again we’re watching our futures in ticking numbers and advancing line graphs. There is, at least, some solace to be found in volatile markets for the careful estate planner, however.
Indeed, there are a number of ways that the present woes of the marketplace can create a useful estate planning environment, and a few of them can be found in this recent article from the Wall Street Journal. In large part the advice divides between whether you have holdings in private or public stock, but there are three ideas.
If you have holdings in private stock, then volatility raises the possibility of greater discounts when gifting. In general, private stock can have discounts up to 30% or 35% applied when they are gifted simply because, without public trade, it would have been harder to find a buyer and the IRS takes note of that fact. The IRS, thankfully, can also be persuaded to take note of market volatility and its affect on the sale of private stock. With volatility too high (hovering around 40 by the Chicago Board Options Exchange Volatility Index) discounts might range as high as 40% to 50%.
If you have public stock, then consider a Grantor Retained Annuity Trust (GRAT). As many readers will know, a GRAT works like a trust turned annuity, since you put assets in a trust and thereafter receive payments for a set period. The principle benefit is the ability to give away assets without paying tax on the appreciation. With markets as they are, and with interest rates at such lows, timing could be perfect to form a GRAT around depressed assets and lock out the tax-man when those assets bounce back. (The GRAT just has to rise above the IRS’s “hurdle rate” presently 2.2% a year.)
Finally, even simple options can work wonders: with low interest and low stock prices, it may also be the time to make an interfamily loan to fund an investment. Using the loan to purchase depressed stock (or depressed real estate if you have faith in that market) can secure that appreciation for your family member.
These are a few of the WSJ’s ideas to get started. You’ll find some more out there (like Deborah Jacobs’s recent advice on gifting), but in general it’s a good time to look over your assets and your plans with your counsel. You need to weather the present storm, yes, but there’s more work to be done too.
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Reference: The Wall Street Journal (August 20, 2011) “How Volatility Eases Estate Planning”