Here’s how the super-rich pass their wealth on to their heirs tax-free when the markets are down


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A lousy stock market is often no reason for investors to rejoice. But for the ultra-rich, it may offer a way to cut property taxes down the road.

Indeed, a type of trust gives them a better chance of transferring some of their wealth to their children, grandchildren or other heirs tax-free when markets are down – but a later rebound is expected, according to the estate planners.

An annuity trust retained by the grantor – pronounced “Grat”, for short – facilitates the benefit.

Simply put, the wealthy place assets such as stocks or shares of a private company in the trust for a fixed term, perhaps two, five or 10 years. Thereafter, any growth in the investment passes to the heirs and the owner gets their capital back.

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By transferring any future appreciation out of their estate, the wealthy can avoid or reduce estate taxes upon death. Investment growth becomes a tax-free gift to the heirs. In the absence of growth, the asset simply reverts to the owner with no transfer of wealth.

Depressed assets that are likely to “rise” in value over the life of the trust therefore offer the greatest probability of success.

The S&P 500 Indexa barometer of U.S. equities, is down about 24% this year, making it a good time to consider a grantor-retained annuity trust, estate planners said.

“It’s reasonable to believe the market will improve over the next two years,” said Megan Gorman, founder and managing partner of Checkers Financial Management in San Francisco, of two-year term trusts. “We will likely have significant appreciation for the recipients.”

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Mark Zuckerberg, co-founder and CEO of Meta Platforms, in July 2021.

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The Grat technique makes more sense for households subject to inheritance tax, experts said.

The federal estate tax is a 40% levy on estates valued at more than $12.06 million in 2022. The taxable amount is double that figure, or $24.12 million, for couples married.

Twelve states plus Washington, DC, also have a state-level estate tax, the amounts and thresholds of which vary, according to the Tax Foundation.

Some of the richest people in the country and well-known business scions have taken advantage of Grats, according to reports. They include Michael Bloomberg; Meta co-founder Mark Zuckerberg; Sheldon Adelson, the late casino magnate; the Walton family of Wal-Mart fame; Charles Koch and his late brother, David Koch; fashion designer Calvin Klein; Laurene Powell Jobs, widow of Apple founder Steve Jobs; media mogul Oprah Winfrey; Lloyd Blankfein, senior chairman of Goldman Sachs; Stephen Schwarzman, chairman and co-founder of private equity firm Blackstone.

“It’s the tenth of 1% of society that it really applies to,” Richard Behrendt, a Mequon, Wis.-based estate planner and former IRS tax attorney, said of trusts. “But for this segment, I think it’s a golden opportunity.”

The estate tax threshold is set to be cut in half starting in 2026, absent an extension from Congress. A tax law passed by Republicans in 2017 doubled the estate tax threshold to around its current level, but only temporarily.

This impending deadline may mean that people with around $6 million in estate (or $12 million for married couples) may also weigh in on a wealth transfer now, experts said.

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Jerome Powell, Chairman of the US Federal Reserve, September 23, 2022.

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But rising interest rates pose a challenge.

This is due to the complex inner workings of these trusts. Investment growth must technically exceed a certain threshold – the “7520 interest rate”, also known as the “hurdle” rate – to become tax-free from his estate.

The 7520 rate, fixed monthly, is currently 4%, up significantly from 1% in October 2021. It has risen as the Federal Reserve aggressively raises its benchmark interest rate to reduce high inflation.

Here is an example of how this applies to a settlor-retained annuity trust. Let’s say that investments in a two-year trust increased by 6% during this period. A hurdle rate-indexed trust in October 2021 would pass 5% of overall growth to heirs; however, that would drop to 2% for a trust established this month.

“The hurdle rate has gone up 400% in one year,” said Charlie Douglas, an Atlanta-based certified financial planner and president of HH Legacy Investments. “I think the strategy still has merit, but there is a little more lag [it].”

And while the technique makes sense in the event of a significant market downturn, it’s hard to say how soon stocks will rebound, Douglas added.

“Calling down is always difficult,” he said.


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