The Effect of Market Volatility on Estate Planning

4:36 pm Asset Protection, Estate Planning

stock down arrow e1314376366416 The Effect of Market Volatility on Estate PlanningA recent Wall Street Journal article noted that while market volatility may make managing investments a boondoggle for many Americans, it can be a boon for some wealthy families looking to shelter assets while assisting their children.

As the article notes, there are two factors that are currently affecting many estate planning strategies that also favor families now:  low interest rates and the increase in the federal gift tax exemption to $5 million through 2012.

Here are three suggestions on taking advantage of the current economic climate:

Discounts on privately held company stock:  the IRS generally allows a 30-35 percent discount on stock in privately held companies that you give away.  However, when the market is volatile, private stockowners can sometimes obtain larger discounts for their holdings – sometimes as much as 65 percent.

GRATs:  grantor-retained annuity trusts (GRATs) work best when interest rates are low, so putting battered stock in a GRAT now is what the article calls a “no-lose situation” for estate planning.  When the stock recovers, a GRAT allows you to transfer most of the upside to your children, or to a trust for their benefit, with no gift tax.

One caveat is that assets placed in a GRAT have to appreciate more than the hurdle rate calculated by the IRS – but at the current hurdle rate of 2.2 percent, it may not be hard to beat.  And, if the assets in the GRAT continue to depreciate, they can either go back to the original owner or the GRAT can be re-set by purchasing back the assets and transferring them to a new GRAT.

Family loans:  families can take advantage of low stock prices and low interest rates by making a intrafamily loan to fund an investment, and the children would get anticipated appreciation on the assets after repaying the loan.

Your California legal and financial planning experts are at your service; Contact us today.

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