Katherine Akinc joined Russ Norwood and Alex Clendennen of Venturi Private Wealth and discussed timely estate planning opportunities in 2020. This blog is a modified transcription of the virtual event that was hosted on May 21, 2020 and the opinions stated are those of Katherine Akinc.
You may think this topic is not for you if you have an estate in the $5-6M range, but don’t check out quite yet because as we have recently learned, we are going back down to a $5 million exemption. If you might have a need for that in 2025, let’s get familiar with a basic gift trust. This can be a trust for each of your children/beneficiary, and you can make annual gifts to it. You won’t have any tax consequences, but you can start to get familiar with it, and your beneficiary can start to get familiar with how trusts work – what the different terminology is, how the distribution standards will work, things along those lines.
Grantor Retained Annuity Trust (GRAT)
Another technique worth considering this year is the GRAT, or grantor retained annuity trust. In my opinion it’s a win-win structure because of the lower 7520 rates. You can set one of these grantor retained annuity trusts for a term of years, let’s say five or 10 years, and it has a reasonable chance to get a good amount of money out of your estate. You set up the trust and let’s say you put in $2 million of securities, and it is set up based on the 7520 rate that is in existence on the date of establishment. So, you establish it in May of 2020 that rate is 0.8. Over the next 10 years, that GRAT is going to pay you back, you’re the grantor. They’re going to pay you back whatever you put in it. Since you put $2M in there, you’re going to get $2M back at the end of the 10 years. It’s going to be split up into an annuity over those 10 years.
Let’s say that you put in some sort of stock. Something that’s down a little bit right now, but potentially over the next 10 years, that stock may appreciate in value a good amount. Any amount that appreciates over the 7520 rate (over 0.8), will go to the beneficiary at the end of that 10 year term. $2 million is going to come back to you over the 10-year term and that 0.8 is also going to come back to you. But anything more than that (if it appreciates 5% and you’ve got 4.2% of that $2 million) is going to go to the beneficiary at the end of that 10 year term without using any of your lifetime exemption. A lot of people like these GRATs; they call them rolling GRATs, because as soon as they finish and they get that full $2M back, they put it into another GRAT and kind of keep on doing the same thing because you’re always getting that money back. It’s the appreciation that’s going to the beneficiary. And if for some reason that stock does not come back, well then you’ll still get it back. There just won’t be anything that goes to the beneficiary. So you won’t really be in a worse state than you would if you just held onto it in the first place. Many clients have gotten about a substantial discount on the value of an operating private company, then using a technique similar to this, to pass along the appreciation over the coming years.
You can also put real estate into a GRAT. But I want to highlight that you don’t have to have a closely held business or real estate property that you want to get rid of. It can be done just with publicly held securities where you are basically giving away the upside. You’re not giving away your principal necessarily, but if you’re close to the margin of having a taxable estate, you’re giving away the upside. The GRAT is a technique that is particularly well suited now because so many assets are at a low value and will potentially appreciate in the coming years. It’s a little bit different when our 7520 rate was 3%, then the asset would have to appreciate over 3%. And only that difference would get to the beneficiary. Now with such a low 7520 rate, you’re potentially going to get a lot of appreciation that ends up being transferred. So this is a particularly good time to kind of dip your toes in the water if you want to start thinking about some of these techniques. That may be a silver lining to the COVID-19 situation – it’s a great opportunity.