Elizabeth Kearns, Vice President at Chevy Chase Trust, discusses changes you should consider.
What estate planning opportunities should I consider right now?
Increased market volatility can be stressful for investors but it creates estate planning opportunities for individuals who might have a taxable estate. Down markets are ripe times for transferring assets out of your estate at depressed values, thereby using less of your allowable estate and gift tax exemptions.
What is the best way to transfer assets out of my estate?
The simplest planning technique is to make gifts of your assets to others. If you make an in-kind gift of securities while they are at a temporarily depressed value, you’ve successfully transferred an asset out of your estate at a lower cost to your lifetime estate and gift tax exemption.
What if I’m not sure about making a permanent transfer?
If you’re not interested in giving away your assets forever, you might consider a Grantor Retained Annuity Trust, or GRAT. Rather than transferring assets out of your estate permanently, this trust allows you to transfer future appreciation of your assets out of your estate, while receiving your initial investment back in the form of annuity payments. You would create the GRAT for a fixed term – typically two or three years – and transfer assets such as stocks into the trust. Over the trust’s term, you receive annuity payments equal to your original investment plus interest at a “hurdle rate” set by the IRS. At the end of the term, if the trust’s investments have grown at a higher rate than the IRS hurdle rate, that excess appreciation goes to the beneficiaries of the trust. And because you receive your original investment back via the annuity payments, there is no gift tax. In this low interest rate environment, there is greater potential for the stocks you transfer to the GRAT to outperform the hurdle rate. Of course, having an active portfolio manager to assist with the timing and the selection of securities is key.
Given today’s social distancing environment, how can I accomplish this?
Both Maryland and the District of Columbia have passed emergency temporary legislation to facilitate the execution of estate planning documents virtually. Check with your jurisdiction because this kind of legislation is becoming increasingly common to enable individuals to finalize their estate planning from home.
Our team of experienced estate planning attorneys and financial planners are prepared to advise you on these and other techniques.