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How Wealth Transfers Impact You and Your Family

2020 has been a very volatile year in the equity and fixed income markets. While all of our clients are invested and prepared for the long-run with their portfolios, volatility sometimes can be a friend in the estate planning process. This short article will explain what techniques one can use to better plan for their estate plan and for families to take advantage of different market conditions. When asset values are depressed or when interest rates are low, high net worth individuals can take advantage of a variety of wealth transfer strategies intended to minimize future taxes. Columbia Pacific Wealth Management helps our clients understand their estate tax situation and capacity to transfer wealth. When appropriate, we partner with estate planning attorneys to design and implement wealth transfer strategies to help clients accomplish long-term goals. We will provide sample strategies that we have helped implement for our clients.

Grantor Retained Annuity Trust (GRAT)

Grantor Retained Annuity Trusts (GRATs) are a great tool for transferring wealth to future generations. Success is based on growth rates of a particular asset or portfolio vs. IRS-prescribed interest rates. The Grantor of the Trust will receive back the initial funding value plus interest, while the upside growth can pass to a future generation gift-tax free at the end of the Trust’s term. Low interest rates result in a “low hurdle” and volatile markets can provide windows to create and fund GRATs that have growth potential.

Charitable Lead Annuity Trusts (CLATs)

Charitable Lead Annuity Trusts (CLATs) build on the same concepts of a grantor retained annuity trust and are especially powerful for clients with charitable goals. In a CLAT, a charitable entity, such as a family foundation, receives a fixed payment amount over the Trusts’ term, determined at inception values and interest rates. These payments to a charitable entity also generate potential income tax deductions. At the end of the Trust term, all the growth of the asset base can transfer to future generations, gift-tax free. Again, low interest rates and depressed asset values can be a great opportunity to contemplate CLAT strategies.

Family Loans

Family loans can be a great way to drive wealth transfer goals, especially during low interest rate environments. As long as loans are made at or above IRS-prescribed interest rates, gift-tax can be avoided. Even previously made family loans can be refinanced when interest rates are low. Clients might decide to help a child or grandchild purchase a home, start a business, or even just invest capital with a low-interest rate loan. Upside growth potential moves down family generations. Clients can sell assets with high growth potential as a family wealth transfer, financed by a low-interest rate loan. Like a grantor retained annuity trust or charitable lead annuity trust, this strategy helps fix current values in the clients’ estate, while moving growth to younger generations.

If you have any questions on how these strategies could apply to your situation, contact us to learn more.


Important Disclosure Information:

Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.