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Volatile Economy Creates Great Opportunities for Estate Planning

By November 28, 2011Estate Planning

The instability in the economy may be stressful for some as they watch their investments seesaw almost daily. However, the current economic conditions are favorable for those who are looking to pass assets to family members with as little inheritance tax penalties as possible. While it may seem counterintuitive, economic downturns are the best time to begin estate planning, and there are several ways to capitalize on the depressed conditions.


Congress has temporarily raised the limit, from $1 million to $5 million, on the amount of money that people may give while alive without paying gift taxes. However, the limit reverts to $1 million at the end of 2012. People with potential estate tax problems can benefit from this temporary opportunity.

Discounts on Stock

The IRS allows those who give away large amounts of stock in privately-held companies to discount about 30 to 35 percent of the value of the stock to account for the lack of a market for the stock. However, when the stock market is performing poorly, people may get a much larger discount. Some estate planners have used the Chicago Board Options Exchange Volatility Index, or VIX, to argue for as much as a 40 to 50 percent discount on stock gifts.


When the economy is underperforming, interest rates are low, creating an excellent time to establish a grantor-retained annuity trust (GRAT). With such a trust, the grantor puts an asset in the trust but retains the right to receive payments for a set amount of time. GRATs can be for terms as short as two years, which adds to their popularity.

GRATs allow grantors to pass future appreciation of an asset to beneficiaries without having it taxed. If the assets in the GRAT do appreciate, family members benefit from the increase without having to pay any gift or inheritance taxes. However, the assets must appreciate more than the IRS's "hurdle rate," which currently sits at 2.2 percent. If the assets decline in value or stay static, they revert back to the grantor. A down market is an ideal environment for creating a GRAT.


Current low interest rates allow a person to loan family members money to buy assets that will appreciate in value. The benefit is that the borrower gets the anticipated appreciation of the asset after repaying the loan, at a very favorable interest rate acceptable to the IRS, while avoiding gift and estate taxes.

The current economic conditions may seem bleak, but they actually afford many opportunities for people to pass their assets to their loved ones with much fewer penalties than in a booming economy. If you are trying to plan for your estate and want to make sure that as much of it goes to your loved ones as possible, without great losses from taxes, seek the advice of an experienced MH estate planning attorney who can advise you of your options.

Source: Wall Street Journal, How Volatility Eases Estate Planning, Kelly Green, 20 August 2011

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