Economic Turmoil Planning: Taking Steps to Take Control

Clients should consider speaking to their advisor about selling devalued assets to an intentionally defective grantor trust for a promissory note. The interest rate on the note is fixed upon the execution of the note and is the applicable federal rate for the term of the loan term selected. The lower the sale price and the interest rate are, the lower is the amount included in the client's taxable estate and the higher is the value in the trust for the beneficiaries.

Use of an IDGT can remove the asset and the future accretion from the client's taxable estate. And no tax on gain, if any, is triggered upon the sale to the trust. If the client has an IDGT, trust cash flow should be reviewed and payment options assessed to ensure there are adequate funds available long before payments are due. If full payments cannot be made, a distribution of corpus may be necessary.

Step 7: GRATs

Grantor retained annuity trusts (GRATS) should be considered as a strategy to remove market recovery from the client's estate at the current lowered gift value. The gift tax to be paid on the value of the trust remainder to be transferred to the beneficiaries is set at the time the transfer to the trust is made. When the beneficiaries receive the GRAT remainder interest, it will include the market recovery, if any, thereby maximizing the transfer of future asset appreciation at a lowered transfer cost.

GRATs are most effective as leveraged wealth transfer tools when the property held in trust appreciates at a rate higher than the government section 7520 rate used to calculate the annuity paid to the Grantor. The lower is the section 7520 rate, the lower is the gift tax value, and the greater is the remainder interest for the beneficiaries.

A qualified personal residence trust is a type of GRAT used specifically for qualified personal residences and is codified in Internal Revenue Code Section 2702. Like other GRATs, QPRTs for depressed value personal residences should be considered to remove market recovery from the client's estate at the lowered gift value.

Step 8: Split-Dollar Loan Treatment

Split-dollar loan treatment has replaced the old equity split-dollar arrangements typically offered as employee benefits. The employer makes loans to the employee for the purchase of a life insurance policy. The employee is entitled to the equity in the policy after repayment of loans and interest.

In the current interest rate environment, the employee benefits from receiving loans at a lower interest rate. Split-dollar loans may also be made between family members or to an irrevocable life insurance trust for estate planning purposes. For both private and employment-related split dollar loan arrangements, the premium loans bear interest at the appropriate applicable federal rate, depending upon the length of the loan term. The lower is the AFR, the lower is the cost of the loans being made.

Now is a critical time to meet with clients to review all aspects of their planning. No matter how good the plan was when completed, no one could have anticipated the current economic environment. Since interest rates and asset values are bound to go up at some future point, and since that point cannot be predicted, moving the client to action now may help the client take advantage of the planning opportunities while protecting the client from unintended results.

Janice A. Forgays, Esq., CLU, is vice president of estate and business planning at MassMutual Financial Group

Springfield, Mass. You can e-mail her at [email protected]