It’s pretty bad out there. By now, 2020 has exceeded the expectations of even the most embittered pessimist. In economic terms, things have rarely been worse. And yet, the storm has produced small pockets of opportunity. Market volatility and government stimulus measures have driven changes of huge potential benefit for estate plan holders.
Grantor Retained Annuity Trusts (GRATs)
The GRAT is an excellent vehicle for anyone who would like to maintain their current asset base but pass appreciation to beneficiaries and right now is a very good time to set one up. The current market dip has driven the April 7520 rate down to 1.2% compared to 1.8% in March. This rate acts as a hurdle for the GRAT; appreciation in excess of the hurdle can be gifted tax-free. With the young generation being hit the hardest by the pandemic-triggered economic downturn, there could be no better time than now to start thinking about how to maximize their inheritance.
In response to tanking markets, the Federal Reserve slashed interest rates in March in an effort to stabilize the economy. April’s short-term Applicable Federal Rate (AFR), which must be charged on intrafamily loans, hit 0.91%. That’s exceptionally low. If you are a parent or grandparent who has set up an intrafamily loan hoping to help a child or grandchild get on their feet economically, now is the time to consider amendments to take advantage of these low rates.
Sales to Defective Grantor Trusts
With interest rates plummeting and market sliding into recession, sales transactions have rarely looked so good. On top of this, experts anticipate big increases in discounts for minority interests in limited liability corporations (LLCs). This means that selling such interests in family investment LLCs carries enormous potential for shifting value to future generations.
If in reading all of this, you’ve found yourself thinking, “wait, but none of that creates immediate value for my estate now,” you’re right, it doesn’t. But you’re not the one who’s going to need a leg up going forward. Millennials entered the workforce during the worst downturn since the Great Depression and now, as they reach their peak earning years, are being pummeled by another once-in-a-lifetime market crash. Little good is coming of the Covid-19 pandemic except, perhaps, the opportunity it provides for us to help one another out. However, this glimmer of hope won’t break through the clouds unless we act to enhance its shine.
Many of the folks staying indoors to protect the most physically vulnerable, are, themselves, increasing their vulnerability to economic instability. Meanwhile, many most at risk of the virus are protected from financial worry by a life lived in economic boomtimes. Perhaps the best way to show appreciation for this collective sacrifice is to pay it forward in the ways each of us is most able.