Estate planning in down market: Using depressed values to pass on greater wealth  


For only the fourth time in the market’s history, both equity and fixed income returns posted consecutive negative quarters.  Other asset classes, including precious metals and real estate, are also experiencing weakness.  While this creates uneasiness (and even heartburn) for investors, from an estate planning perspective it creates the opportunity to pass greater wealth to future generations.

The most successful wealth transfer occurs when the assets transferred go on to increase in value.  In such a case, not only is the current value of the assets removed from the grantor’s estate, and therefore estate taxes, but future appreciation occurs outside the grantor’s estate—also avoiding estate taxes.  Transferring wealth during periods of depressed asset values, like coiling a spring, allows for the passing of assets with the potential to expand when the market recovers (as markets have historically done).  There are various methods to accomplish such a wealth transfer, each with its own considerations and potential benefits.

OUTRIGHT GIFTING is perhaps the simplest way to capitalize on reduced asset values.  For example, assume you wanted to make a gift of 1,000 shares of the Vanguard 500 Index Fund ETF (Ticker VOO).  If you transferred the shares, perhaps to a trust for your children, on January 1st, 2022, the gift would have a value of $437,420 (the gift-tax value is the average of the high/low on the date gifted or on the closest trading date).  If you transferred an identical 1,000 shares on June 1st, 2022, after the market’s five-month decline (coiled spring), the gift would have a value of only $378,370.  The market’s decline in value would allow you, for the same dollar amount ($437,420) to transfer 156 more shares (1,156 total on June 1st).  Should VOO eventually recover (uncoil or spring back) to the January 1st price, those transferred shares would be worth $505,658. 

SPLIT INTEREST GIFTS are gifts involving two interested parties—one person with a current interest and another person with a remainder interest.  An advantage of split interest gifts is they can be structured to use little, or none, of the gift-tax exemption.  Examples of split-interest gifts that can be advantageous in down markets include:

  • GRANTOR RETAINED ANNUITY TRUSTS (GRATS).  With a GRAT, the grantor transfers assets to a trust and retains the right to annual payments from the trust (calculated using an IRS published interest rate called the 7520 rate) for a period (the term).  At the term’s expiration any remaining assets pass free of gift, estate, and income tax to remainder beneficiaries (either outright or in further trust).  With most GRATs, the present value of the projected term payments to the grantor equal 100% of the value of the assets at time of transfer, so no taxable gift occurs at funding.  At the end of the term, any appreciation (uncoiled spring) passes to the remainder beneficiaries. 
  • CHARITABLE LEAD ANNUITY TRUSTS (CLATS).  With a CLAT, instead of the grantor receiving the term payments, a charity (or charities) selected by the grantor receive annual payments during the term.  At the end of the term, the assets pass free of gift, estate, and income tax to remainder beneficiaries (either outright or in further trust).  If the CLAT is established as a grantor trust, as an added benefit the grantor will receive a charitable income tax deduction in the year of funding equal to the present value of the gifted assets.
  • INTENTIONALLY DEFECTIVE GRANTOR TRUST (IDGT).  With an IDGT, assets are sold by a grantor to a grantor trust in exchange for a promissory note.  Because the trust is a grantor trust, the grantor is considered the taxpayer for income tax purposes and therefore the sale is a non-taxable event.  The interest rate used in the promissory note can be lower than the discount rate used for a GRAT, and unlike the annual payments of a GRAT, the promissory note terms can be structured in a wide variety of ways including a balloon payment with principal payments delayed for years.  If depressed assets are sold (coiled spring) and appreciate (uncoil) during the term of the promissory note, the appreciation in excess of the note term accrues to the beneficiary.

While reduced asset values resulting from depressed market conditions can benefit wealth transfer, rising interest rates can make many wealth transfer strategies seemingly less effective.  However, the effect of higher interest rates can be mitigated by the future appreciation of transferred assets, especially where significant appreciation occurs.  By way of example, consider the sale of $1,000,000 in assets using an IDGT in exchange for a 5-year note.  For comparison purposes, we’ll use the January mid-term interest rate (1.17%) and the July rate (3.22%) and assume that the assets grow at a 7% annual rate of return.  A January transfer results in the passage of approximately $327,529 to the beneficiaries whereas a July transfer only passes $203,839.  If the annual rate of return is 15%; the difference shrinks considerably $911,101 for a January transfer compared to $745,101 for a July transfer. The more rapid the growth of transferred assets, the less onerous the effect of higher interest rates.

In addition to the transfer techniques mentioned above, there are also other planning strategies that might be particularly beneficial to consider in the current market environment.  While a sour market is disappointing, it may also offer opportunities for those willing to look and willing to try to make lemonade from the market’s lemons.  Your Manchester Capital advisor is ready to assist you in looking for and identifying such opportunities.


This material is solely for informational purposes and shall not constitute a recommendation or offer to sell or a solicitation to buy securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented herein has been developed internally and/or obtained from sources believed to be reliable; however, neither the author nor Manchester Capital Management guarantee the accuracy, adequacy or completeness of such information.

Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after any date indicated. Any forward-looking predictions or statements speak only as of the date they are made, and the author and Manchester Capital assume no duty to and do not undertake to update forward-looking predictions or statements. Forward-looking predictions or statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward- looking predictions or statements. As with any investment, there is the risk of loss.


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