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Here’s how uber-rich pass wealth tax-free to heirs during down markets


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A lousy stock market is commonly no reason for investors to cheer. But for the uber-rich, it could offer a path to lower estate taxes down the road.

That is because one variety of trust gives them higher odds of shifting some wealth to their children, grandchildren or other heirs tax-free when markets are down — but a subsequent rebound is anticipated, in keeping with estate planners.

A grantor-retained annuity trust — or “Grat”— facilitates tbenefit.

In basic terms, the rich put assets like stocks in a privately held business into the trust for a specified time, perhaps two, five or 10 years. Afterward, any investment growth passes to their heirs and the owner gets back the principal.

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By shifting any future appreciation out of their estate, the rich can avoid or reduce estate taxes at death. The investment growth becomes a tax-free gift to heirs. Absent growth, the asset simply passes back to the owner with out a transfer of wealth.

Depressed assets which are prone to “pop” in value over the trust’s duration, subsequently, yield the very best likelihood of success.

The S&P 500, a barometer of U.S. stocks, is down about 24% yr thus far — making it a ripe time to think about a Grat, estate planners said.

“It’s reasonable to consider the market will improve over the subsequent two years,” Megan Gorman, founder and managing partner of Chequers Financial Management in San Francisco, said of trusts with a two-year term. “We’ll likely have significant appreciation pass to beneficiaries.”

Strategy utilized by Mark Zuckerberg, Oprah Winfrey

Mark Zuckerberg, co-founder and CEO of Meta Platforms, in July 2021.

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The Grat technique makes probably the most sense for households subject to estate tax, experts said.

The federal estate tax is a 40% levy on estates valued at greater than $12.06 million in 2022. The taxable amount is double that figure, or $24.12 million, for married couples.

Twelve states plus Washington, D.C., even have a state-level estate tax, the amounts and thresholds of which vary, according to the Tax Foundation.

Among the nation’s richest people and well-known business scions have leveraged Grats, in keeping with reports. They include Michael Bloomberg; Facebook parent Meta co-founder Mark Zuckerberg; Sheldon Adelson, the late casino magnate; the Walton family of Walmart fame; Charles Koch and his late brother, David Koch; clothier Calvin Klein; Laurene Powell Jobs, the widow of Apple founder Steve Jobs; media mogul Oprah Winfrey; Lloyd Blankfein, senior chairman of Goldman Sachs; and Stephen Schwarzman, chairman and co-founder of the private equity firm Blackstone.

“It is the one-tenth of 1% of society to whom this is admittedly applicable,” Richard Behrendt, an estate planner based in Mequon, Wisconsin, and a former estate tax attorney on the IRS, said of the trusts. “But for that segment, I feel it is a golden opportunity.”

The estate-tax threshold is scheduled to be cut in half starting in 2026, absent an extension from Congress. A Republican-passed tax law in 2017 doubled the estate-tax threshold to around its current level but only temporarily.

The looming deadline may mean individuals with roughly $6 million estates (or $12 million for married couples) may weigh a wealth transfer now too, experts said.

Why rising rates of interest are a headwind

Jerome Powell, chairman of the U.S. Federal Reserve, on Sept. 23, 2022.

Al Drago | Bloomberg | Getty Images

But rising rates of interest pose a challenge.

That is attributable to the complex inner workings of those trusts. Investment growth must technically exceed a certain threshold — the “7520 rate of interest,” also often known as the “hurdle” rate — to pass tax-free from one’s estate.

The 7520 rate, set monthly, is currently 4%, up significantly from 1% in October 2021. It’s risen because the Federal Reserve aggressively increases its benchmark rate to scale back high inflation.

Here’s an example of how this is applicable to a grantor-retained annuity trust. For instance investments in a two-year trust grew by 6% over that point. A trust pegged to the hurdle rate in October 2021 would let 5% of the general growth pass to heirs; nevertheless, that may fall to 2% for a trust established this month.

“The hurdle rate is up 400% in a single yr,” said Charlie Douglas, an authorized financial planner based in Atlanta and president of HH Legacy Investments. “I feel the strategy still has some merit, but there is a bit more drag on [it].”

And while the technique is sensible when there’s a major market downturn, it’s tough to say how soon stocks will rebound, he added.

“Calling the low on it’s all the time difficult,” Douglas said.

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