Volatile Planning

The stock market, interest rates, and other economic and
political circumstances have experienced considerable volatility of late. How
should your planning be modified to address volatility?

Core Planning:

It
shouldn’t change. Whatever the markets and environment, volatile or calm, you
need to have the key legal documents and planning in place. More significantly,
since estate planning is long term, your planning and documents will be impacted
by volatility at many points in the future, even if you view the waters as calm
at any particular time. Here’s the “volatility spin” on estate planning:

Rolling GRATs:

Not
even a distant cousin to Dylan’s rolling stone. Grantor Retained Annuity Trusts
(“GRATs”) are a technique that can shift value out of your estate for modest
gift tax cost. Transfer assets to a GRAT which pays you a high annuity for a
short period, say two years. To the extent that your investment returns exceed
the current federal interest rate, that gain is outside your estate tax free.
If you catch the upside volatility in your GRAT you have the tax equivalent of
a grand slam. If you catch the wrong side of the market swings, the GRAT busts,
and you try again, with little down side. This repeated application of GRATs is
referred to as rolling, or cascading, GRATs. These short term GRATs thrive on volatility.

Market Timing:

While investment theory advises against market timing, estate planners love
their version of it. If interest rates are high QPRTs work better. If interest
rates are low GRATs and IDITs work better, and so on. From this perspective,
volatility can enhance planning.

529 Plans:

Not feeling
financially secure? Instead of making annual gifts (you can gift $12,000/year/donee
gift tax free) to the grandkids or trusts for them, instead gift the cash to
529 college savings plans for which you’re the account owner. If the volatility
hits you the wrong way, and you’re in need of milk money, as the account owner you
can withdraw funds from the 529 plans (yes, subject to a penalty, but at least
you can access the assets). If your worries prove unfounded, the money can
remain in the 529 plan so Junior can go to college instead of flipping pizza
for a living.

Self Funded Trust:

Set up a self funded (you put the money in) trust in which you remain a
beneficiary. This type of trust is permitted in a number of states, including
Delaware and Alaska. Arguably (but it’s not guaranteed and proven) you can gift
assets to the trust and they will be removed from the reach of your creditors,
and from your taxable estate. You will still be able to receive distributions
from the trustee if you need them. If volatile times make you feel too
financially insecure to give up assets completely, but you want to continue
asset protection and estate tax minimization planning, these trusts could be
the ticket.

Bypass Trust:

These are the trusts used to safeguard the amount that can be passed estate tax
free on the death of the first spouse. Many bypass trusts are drafted to permit distributions to the
surviving spouse, children, and even others. If volatility has your stomach in
knots, modify the trusts in your wills so that the bypass (applicable
exclusion or credit shelter) trust
names only your spouse as beneficiary. If times get tight, it may be better not
having the kids’ fingers in that pot. If you’re really worried, bequeath
everything outright to your surviving spouse (and vice versa) and give your
spouse the right to disclaim into a bypass trust. This gives the survivor the
right to total control over the funds if times are tight.

Buy Life Insurance:

Stop your gift program if you’re worried you’ll run out of money, and instead
buy life insurance to pay estate tax or provide an inheritance for your heirs.
Put a bumper sticker on your new Hummer “I spent my kid’s inheritance on this
car”.

Plan and Draft Flexibly:
Make all your planning and documents flexible.
Don’t mandate distributions from trusts in case someone else needs them. Reduce
specific bequests to friends, charities and other secondary beneficiaries in
your will so that key heirs inherit more. Use percentages instead of fixed
dollar bequests or gifts.