During a down economy, estate planning becomes the lowest priority as their net worth either stagnates or starts decreasing and people start looking for the options with which they can save maximum. However, they are unaware of the fact that some estate planning techniques work specifically during a recession and low-interest period. Expending money on such techniques can prove out to be an excellent option to dispense the asset from your estate while saving the taxes imposed on them. The economic recession can provide you with some opportunities if you approach estate planning with a long term perspective.
Estate Planning In the Down Economy-
There are many estate planning techniques that you can utilize to make the down economy advantageous and enjoy the benefits when the economy starts to come back gradually. Below are some of such ways to help you know the opportunities and take advantage in long run.
ROTH IRA: The first option is to convert a traditional IRA to a Roth IRA irrespective of your income level. By doing so, there will be no tax implications during the withdrawal of your contributions and earnings. Also, there aren’t any specific minimum withdrawals from an IRA which implies that your IRA assets can continue to grow tax-free. Though you are taxable on all pretax IRA contributions and earnings, however, the value of your estate for taxes will be reduced by them.
GIFTING: The other option is to gift up to $14,000 per year to any of your heirs or loved ones or even to any number of people. This amount can also be doubled to $28,000 if your spouse also contributes with you and the amount will be exempted from gift tax. This technique can be used during economic recession when the stock market is running low that will enable you to gift shares of low value which will be profitable when the market will come back to shape in later years. You can also gift your share at low values at such time when it is tax-free and later when the market rises such shares will not be part your taxable estate.
GRATS: A Grantor Retained Annuity Trust (or GRAT) allows you to transfer the appreciated assets with minimal or no tax. In this the creator transfer the assets to the trust for predetermined length of time. During this period, the creator receives annual payments based on the market percent value of the assets or a fixed set amount. When interest rates are low in a down market, this is particularly attractive. When the trust term ends and the creator survives, then these assets pass to your beneficiaries without any gift tax. However, the drawback is if the creator pass away before the GRAT term expires, then the assets are added back into his/her estate.
As the Internal Revenue Service rate for GRATs is relatively low and the value of the assets held by individuals is also relatively low, a GRAT can prove to be a useful technique to transfer potential appreciation in an asset at a very low gift tax cost.
QPRT: A Qualified Personal Residence Trust (or QPRT) can be utilized if the value of your residence has suffered due to economic recession, however, it is likely to increase in the future. This kind of trust permits you to name your ownership interest in the house to your children, however, you need to live in that residence for a set term of years. The QPRT holds the current market value of your residence for transfer tax implications and your beneficiaries receive the appreciated house without worrying about gift tax on the increased value. However, it is mandatory for you to survive the term of the trust to enable the smooth transfer of your house to your heirs. Also, it is to be noted that once the transfer has been done, if you want to live in that house, you will have to pay the rent as per the market rate to the beneficiaries.
CLAT: A Charitable Lead Annuity Trust (CLAT) is another type of trust that provides for a payment of a fixed dollar amount to one or more charitable beneficiaries for a specific period after which the remaining assets are transferred to the beneficiaries. In this an annuity is paid to the charity at least once in a year while the creator receives a charitable deduction based on the present value of the annuity payments. The taxable gift’s value is the same as paid while creating the CLAT irrespective of the current value of annuity payments.
There is always a greater chance that the rate of return on investments in a down economy will be more than the interest rate set by the Internal Revenue Service which increases the chances that there will be additional assets at the end of such trust’s term period which will be passed on to your trust’s beneficiaries with minimal or no tax. However, it is always advised to discuss with an attorney before opting for any of the techniques to decide which one could be the best for you and make the down economy advantageous for you and your heirs.