Although estate planning may seem like a lower priority when your personal net worth is stagnating or diminishing, a down economy provides some exciting estate planning for opportunities for people who approach it with a long term perspective. With interest rates low and assets losing value, revisiting how you own your assets and how you will transfer ownership to your heirs can uncover options that won’t always be available to you.
Specifically, there are a number of trusts that you can create and other estate planning tools that you can use to take advantage of the downturn in the economy and enable your descendants to reap the benefits once the economy returns to normal and begins to grow again.
You can now convert a traditional IRA to a Roth IRA regardless of your income level, which means that there are no tax implications when you withdraw your contributions and earnings. There are no mandatory minimum withdrawals from an IRA so your IRA assets can continue to grow tax-free. You do have to pay income tax on all pre-tax IRA contributions and earnings but they reduce your estate’s value for estate tax purposes.
You can gift up to $14,000 per year to any one person and to an unlimited number of individuals, or $28,000 if your spouse contributes, without a gift tax. You can use this planning in a bad stock market period by gifting shares that have decreased in value but which you expect will make gains in later years. For instance, you may gift more shares at the reduced value during the year that is tax free. When their value rises, they are not part of your taxable estate.
A Grantor Retained Annuity Trust (or GRAT) transfers the appreciated trust assets to beneficiaries without involving a gift tax after a predetermined length of time. The trust makes annual payments to you based on the present value calculation that includes an IRS-mandated interest rate. When interest rates are low in a down market, this is particularly attractive. When the trust term ends and the appreciated value of the assets is more than the sum of the annuity payments, these assets pass to your beneficiaries with no gift tax consequences. The only drawback to this is if you pass away before the GRAT term expires, then the assets are added back into your estate.
A Qualified Personal Residence Trust (or QPRT) can be useful if the value of your residence has suffered, but you are optimistic that its value will rise in the future. This trust allows you to transfer your ownership interest in a house to your children, but then remain in the residence for a term of years. The QPRT freezes the current market value of the residence for transfer tax implications, but then your beneficiaries receive the appreciated house without having to worry about gift tax on the increased value. You do have to survive the term of the trust so that the home transfers to your heirs. If you continue to live in the home after the term expires, you will have to make fair market rental payments to the beneficiaries.
Refinance Existing Loans
Check and see if any outstanding loans to your children or to a trust for their benefit are at rates well above the current APR. If there is no prepayment penalty and you can survive without the cash flow, then refinance at the lower rate. This will reduce the cash flow to the child but allow the wealth to grow without the application of any transfer taxes.
Talk to Dan McKenzie, a Denver estate planning attorney, about these strategies and if they can work to your benefit as well as to your beneficiaries. Estate planning in a bad economy when rates are low and assets falling in value can still work to your advantage in the years to come when the economic climate become more stable.