Using the financial turmoil to lock in long-term tax savings requires complex planning, but business owners and high net wealth families can use various strategies to pass on billions of tax-free dollars to their descendants in this unique environment. The pressure from low interest rates and beaten-down equity valuations make this an ideal time for estate and wealth-transfer planning as well as make it much easier to protect these fortunes from the Internal Revenue Service.

The IRS levies a 40 percent estate and gift tax on estates worth more than $11.6 million in 2020 for individuals and more than $23 million for married couples. For the many business owners that exceed those limits, a great tool to pass money to children and grandchildren tax-free is the GRAT – Grantor Retained Annuity Trust.

Here’s how it works:  A wealthy family will put a stock or other assets in a GRAT, and call it a loan. If the asset rises in value, the appreciation goes to the beneficiaries of the trust tax-free. If the asset value drops, there’s no harm done — the asset or shares just go back to the donor. Heads I win, tails I break-even.

Market declines give assets in GRATs more upside potential. Plunging interest rates are another reason for new attention on GRATs. When taxpayers loan money to set up GRATs or other trusts, the IRS requires that trusts pay interest back to the person loaning the assets. The minimum required interest rate has now fallen by half since the end of 2018, to 1.8% this month. That doesn’t reflect the impact of the Federal Reserve’s recent rate cut.

Making loans to younger family members is another popular strategy used to pass on wealth while avoiding the estate tax. As interest rates drop, high net wealth families should refinance any existing loans to heirs so their trusts are paying less interest back to benefactors. They should also consider making new loans to children and grandchildren, giving next generations the cash to ride out financial fluctuations.

This market volatility is a great opportunity to turn lemons into lemonade. If you have any questions or concerns about how this could affect you, please contact our office or schedule a meeting.