Financial markets, political moods, and the world-at-large can take us on a roller coaster ride of ups and downs. But savvy investors (and their estate planning counsel) know that – in the end – neither the bears nor bulls will get it right 100% of the time. Economic slumps have their silver linings, and boom times don't last forever. On the climbs and dips of the market roller coaster, sharp-eyed riders can find opportunities for savvy wealth-transfer planning.

Interest rates have risen but have not yet jumped to historical highs.

The applicable federal rates ("AFRs") (used as safe harbors for loans between related parties) and the Section 7520 rate (used for determining the present value of an annuity) are still relatively low from a historical perspective. The federal estate tax exemption is still historically high, allowing each person to transfer up to $13,610,000 in 2024 (either during their lifetime or at death) without estate or gift tax consequences. 

This exemption amount is set to increase until 2026, when, under current law, the amount will be reduced by approximately half.

Following the principle that the economy will continue to fluctuate in its normal course – with ups and downs that pay no heed to our personal planning goals – charitably inclined clients or those generally interested in transferring wealth to the next generation can employ several techniques to complete those transfers with minimal estate and gift tax costs, regardless of whether we may find ourselves in an up or a down market environment.

Grantor Retained Annuity Trusts

A grantor retained annuity trust ("GRAT") is a special kind of irrevocable trust. The person who creates and funds the trust – the "grantor" – retains the right to an annuity payment from the trust for a period of years. At the end of the term, the remaining trust property passes to other beneficiaries (such as the grantor's children) either outright or in further trust. Assuming the grantor survives the term, those remaining trust assets are removed from the grantor's taxable estate. 

However, unlike a traditional gift of cash or gift in trust (which could trigger gift tax on the entire amount contributed), only the value of the remainder interest in the GRAT is considered a gift. Because there is no precise way to assess the value of the remainder interest at the beginning of the trust term, the government simply assigns a present value based on interest rates in effect at the time of the transfer. 

By setting the annuity payment at a sufficiently high level, the remainder interest can even effectively have a "zero" value, thus using little or none of the grantor's gift and estate tax exemption to affect the gift. These "zeroed-out" GRATs are especially appropriate for individuals who have already exhausted their lifetime gift tax credits and are already maximizing their annual exclusion gifts.

If the GRAT assets outperform the original interest rate over time, there is a windfall for the beneficiaries of the trust.

This technique can result in a bigger "win" when interest rates are low at the time of the gift, but it can still be effective in slightly higher interest rate environments. 

In any market phase, the future growth of assets in a GRAT easily could outpace the original interest rate, producing estate tax savings for the grantor. When this growth does not materialize, the grantor finds himself or herself in much the same position as before they executed the GRAT, so the downside can be minimal.

Charitable Annuity Trusts

The charitable lead annuity trust ("CLAT") is another useful tool when interest rates are relatively low. By incorporating a charitable element, grantors can meet their current philanthropic goals while achieving gift and estate tax savings.

The CLAT is similar to a GRAT, except a charity receives the annuity. The value of the annuity (and thus a charitable deduction) is determined based on the value of the property gifted to the CLAT and the 7520 rate at that time. At the end of the term, the appreciation in the value of the CLAT property in excess of the 7520 rate at the time of the gift passes to the CLAT beneficiaries free of federal estate or gift tax.

Alternatively, when interest rates are higher, a charitable remainder trust ("CRT") may become more appealing. 

Sales to Grantor Trusts

Closely-held business owners might consider completing an installment sale of discounted business interests to an irrevocable grantor trust in exchange for a promissory note. The note should employ the proper AFR depending on the repayment term. The trust can be designed as a separate entity for federal estate and gift tax purposes while still allowing for trust income to be taxed to the grantor for income tax purposes (thus increasing growth within the trust).

Post-sale appreciation in the value of transferred assets can pass to the trust beneficiaries outside the grantor's taxable estate free of federal estate or gift tax. 

Intrafamily Loans

Senior family members may also consider lending assets at a "frozen" value to junior family members at the appropriate AFR. 

To pass muster, intrafamily loan payment terms must be honored as if the loan were between unrelated parties. If the assets appreciate in value significantly over the course of the intrafamily loan, then the return in excess of the "hurdle rate" benefits the junior family member borrower and is outside the senior family member lender's taxable estate.