Wednesday, January 7, 2009

Estate planning tips for bear markets

There are a couple of estate planning "benefits" that you can get in bear markets and low interest rate environments. The first one is pretty trivial. Give away your assets that have lost value to your heirs. If an asset has fallen in value by 50%, you can now gift twice as much of it, up to the annual $13,000 limit, before having to pay taxes on the gift. Then, if the asset comes back in value, your heir should only have to pay the regular capital gains rates on the gain. If instead you held on to the asset and it came back to full value, when you shed this mortal coil, the asset could potentially be subject to the 45% estate tax, which is greater than the current capital gains rates.

Another tip is to use a grantor retained annuity trust, as described:

A GRAT is an irrevocable trust designed to transfer the appreciation on assets contributed to it with minimal or no gift-tax consequences. It's a popular strategy for transferring wealth in a low-rate environment. That's because of the current IRS-mandated interest rate of 2.4%. Here how it works: Let's say you set up a GRAT and fund it with $1 million in badly depressed stock. Assuming the simplest scenario and a trust term of two years (it could be longer), the GRAT would make annuity payments to you valued at $518,081 in each of those two years. (That includes a calculation of present value you don't want to do at home; those payments can be made in cash or stock.) If the asset appreciates more than those payments—and the odds of that seem good, with a low "hurdle" rate of 2.4%—the excess goes to your beneficiaries tax-free.

If it turns out the asset has appreciated less than those $518,081 payments, the trust fails. The asset returns to you, and you can start another GRAT and try again. A rolling GRAT strategy allows multiple possibilities of catching the asset's rise at a valuable moment. GRATs have a standard structure, so setting up the second or third one is less expensive than the first. (A simple GRAT might cost about $5,000.)

Now, those five grand fees can add up, so you wouldn't want to have too many failed GRATs.

Finally, the story points out that the IRS rate for intra-family lending is now %0.81. Try getting that rate from your local bank.