Proactive Planning During a Time of Uncertainty and Volatility

Theresa Marx
March 22, 2020

This is an opportune time to review your estate planning documents and engage in planning that takes advantage of low market valuations and high volatility.

While COVID-19 spreads in our world, our country and our communities, many may feel that they are only reacting to the news and circumstances surrounding them. But, there are ways to be proactive during this time as we socially distance ourselves and worry about our health and the health of those around us, as well as the volatility in the markets.

From a planning perspective now is a good time to:

  1. Review your estate planning documents
  2. Engage in planning that takes advantage of low market values and high volatility.

Review your estate planning documents
 

Some of us might find ourselves with more free time as we practice social distancing and limit our social engagements. We might also find ourselves worrying about our own health or the health of others. One thing we can do right now to proactively plan is review our estate planning documents. Some documents and questions to consider include the following:

  • Health Care Documents – for example, a health care power of attorney and living will
    • Are the agent and successor agents you name still consistent with your intent?
    • Have you communicated your health care wishes through your health care documents or through conversations with your agents?
  • Financial Power of Attorney
    • Are the agent and successor agents you name still consistent with your intent?
    • Do your agents know that they have been appointed under your financial power of attorney?
    • Do your agents know the scope and location of your assets?
  • Will and Revocable Trust
    • Is the disposition of your assets at your death under your will and revocable trust still consistent with your intent?
    • Are the fiduciaries – executor and successor trustees – you name still consistent with your intent?
    • Do your fiduciaries know the scope and location of your individual assets and the assets held in the trust?

Planning techniques that take advantage of low market values and high volatility
 

As we watch the volatility of the markets and see lower market values in many portfolios, it may feel like an inopportune time to engage in planning. However, when market values are low and you expect them to recover, it can be a good time to implement strategies that will take advantage of the ability to move wealth, or prepay taxes on retirement assets, at those low market values, potentially providing significant tax savings in the future. The following six techniques work well when markets are volatile and market values are low: 

1. Grantor Retained Annuity Trust (GRAT)

A grantor retained annuity trust is an irrevocable trust in which the grantor makes a gift of property in trust while retaining a right to an annual payment (annuity) from the trust for a specified term of years. GRATs can be used for a variety of assets, including assets expected to appreciate significantly. Key characteristics of this strategy include:

  • The right to the annuity is a retained interest that has a value. This value is subtracted from the full value of the transferred property when determining the taxable amount of the gift.
  • If the grantor survives the annuity term, any amount remaining in the trust at the end of the annuity term passes to the trust’s beneficiaries without additional gift or estate taxes. 
  • If the grantor dies during the annuity term, the entire value of the trust generally will be included in the grantor’s taxable estate as if the GRAT had never been created.

Read the full article and listen to our podcast: Benefits of a GRAT when market values are low

2. Installment Sale to a Grantor Trust

The installment sale to a grantor trust strategy takes advantage of the significant differences between the income and transfer tax treatment of irrevocable trusts. The goal of this strategy is to transfer anticipated appreciation of assets at a reduced gift tax cost. Key characteristics of this strategy include:

  • In return for the transfer of property, the trust gives the grantor a note, which carries a market rate of interest and usually requires a balloon payment of principal at the end of the note’s term.
  • In most instances, when a trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but two separate entities for transfer tax purposes.
  • Because the grantor and trust are the same taxpayer for income tax purposes, neither the sale nor the note payments trigger income tax.
  • When the note is repaid, the grantor transfers the appreciation with no tax liability.

Listen to our podcast: Proactive planning with low market values using a sale to a Grantor Trust

3. Spousal Lifetime Access Trust (SLAT)

A spousal lifetime access trust, also known as a lifetime credit shelter trust, may be appropriate for people who are hesitant to give away significant assets now but want to take advantage of the increased lifetime exemption amount, especially while market values are low. Key characteristics of this strategy include:

  • Typically, the grantor makes a gift to a trust for the benefit of the grantor’s spouse and descendants.
  • The grantor and grantor’s spouse retain access to the property given to the trust through the spouse's rights as a beneficiary.
  • The grantor uses some (or all) of the grantor’s lifetime exemption so that no gift tax is payable. The trust assets, as well as any appreciation on those assets, remain outside the grantor's estate and spouse's estate for estate tax purposes.
  • The strategy can be enhanced with the allocation of the grantor’s generation-skipping transfer (GST) tax exemption.
  • Both spouses can create lifetime credit shelter trusts, but those trusts generally should not be identical.

Read the full article and listen to our podcast: Proactive planning with low market values using Spousal Lifetime Access Trusts

4. Roth Conversion

When you convert a traditional individual retirement account (IRA) to a Roth IRA, you pay ordinary income taxes, and possibly the Medicare Surtax, on the amount converted in that year. As a result of paying those taxes, however, the full value of the IRA is then positioned for potential future growth and eventual tax-free distribution to beneficiaries. Key characteristics of this strategy include:  

  • Converting your traditional IRA to a Roth IRA when market values are low may allow you to pay less in income taxes and create an income tax free bucket to grow as the market recovers.
  • There are no required minimum distributions (RMDs) during the owner’s life, allowing more growth potential.
  • No income tax is payable when distributions are made to the beneficiaries after the owner’s death.

Read the full article and listen to our podcast: Proactive Planning in Volatile Markets with Roth Conversions

5. Intra-Family Loans

An individual can make loans to family members at lower rates than commercial lenders without the loan being deemed a gift. Key characteristics of this strategy include:

  • An intra-family loan allows an individual to assist family members financially without incurring additional gift tax.
  • A bona fide creditor relationship, including the payment of interest, is established.
  • Wealth can be shifted if the loan assets are invested by the borrower and earn a higher return than the required interest rate.
  • Interest is paid within the family rather than to a third-party lender.

Read the full article and listen to our podcast: Proactive planning with low interest rates using intra-family loans

6. Outright Gift

An individual can make an outright gift to one or more individuals to take advantage of the increased lifetime exemption amount. Key characteristics of this strategy include:

  • The gift recipient has full access and control over the gifted assets.
  • The grantor uses some (or all) of the grantor’s lifetime exemption so that no gift tax is payable. The gifted assets, as well as any appreciation on those assets, remain outside the grantor's estate for estate tax purposes.

Read the full article and listen to our podcast: Proactive planning with low interest rates using gifts

If you are interested in engaging in planning to take advantage of the current market environment, we encourage you to speak with your tax advisor to explore whether any of these strategies could be right for you.

 

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Theresa Marx is a managing director and senior wealth strategist for CIBC Private Wealth Management in Chicago, with 16 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.