A lousy stock market is often no reason for investors to cheer. But for the uber-rich, it may offer a route to lower estate taxes down the road.
That’s because one type of trust gives them better odds of shifting some wealth to their children, grandchildren or other heirs tax-free when markets are down — but a subsequent rebound is expected, according to estate planners.
A grantor-retained annuity trust — pronounced “Grat,” for short — facilitates the benefit.
In basic terms, the wealthy put assets like stocks or shares in a privately held business into the trust for a specified time, maybe two, five or 10 years. Afterward, any investment growth passes to heirs and the owner gets back their principal.
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By shifting any future appreciation out of their estate, the wealthy 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 without a transfer of wealth.
Depressed assets that are likely to “pop” in value over the trust’s duration therefore yield the highest likelihood of success.
The S&P 500 Index
“It’s reasonable to believe the market will improve over the next two years,” Megan Gorman, founder and managing partner of Chequers Financial Management in San Francisco, said of trusts with a two-year term. “We will likely have significant appreciation pass to beneficiaries.”