Taking Advantage of Down Market and Favorable Interest Rates

April 20, 2020
Brad Galbraith, Esq.

Even as each of us are inundated with negative Covid-19 news, there are positives to be found. Many of these positives can directly benefit us, our families, our businesses, and our estate planning. We can work together to focus on these important changes in the market and structure, or re-structure, our existing estate planning to ensure that we can create the legacy we want both now and in the future. 

Let us share a few key pieces of information with you right now.


A Grantor Retained Annuity Trust (GRAT) is an estate planning tool that can be used to transfer property to your children at a minimal gift tax cost. The recent decrease in the market as a result of the COVID-19 pandemic creates an opportunity to transfer to a trust those assets that have suddenly depreciated in value. If the value of these assets rebound, the amount appreciated over the current value will benefit your children.

The goal of a GRAT is to have the appreciation and income of assets with which it was funded exceed the IRC 7520 rate. This “hurdle rate” is currently nearing historic lows and sits at 1.2% for the month of April 2020.  If a GRAT is being utilized, the value of the appreciation and income exceeding the hurdle rate will transfer to the trust’s beneficiaries with no transfer tax. Thus, the lower the hurdle rate, the easier it is to successfully utilize this technique. Further, it may be easier to identify assets or securities that were significantly depressed as a result of the COVID-19 pandemic and that are expected to experience proportionate future appreciation as the pandemic subsides.

If you have already created a GRAT and funded it with assets that have lost significant value, there may be provisions in the GRAT allowing you to swap assets for other assets of equal value. There is a chance that your current GRAT may not recover to beat the hurdle rate. That provision can be used to substitute cash or a note for the now depreciated assets and then use those same assets to fund a new GRAT under the more attractive conditions stated above.

Sales to IDGTs 

Selling assets to an Intentionally Defective Grantor Trust (IDGT) is another method that can be effective in the current market. This strategy works best by selling to the IDGT those assets that are likely to significantly appreciate in value, in exchange for an installment note, with the goal being the assets appreciate at a greater rate than the interest rate in the note. Two factors in the current market make this an attractive method for estate planners: (1) many assets have recently experienced a sudden decrease in value and will likely regain value as the pandemic subsides; and (2) historically low interest rates.

Selling assets to a trust, opposed to gifting, distinguishes this technique from other estate planning techniques. The sale of assets allows a grantor to transfer assets out of his or her estate without consuming any lifetime exemption. Once the assets are transferred to the IDGT, they can continue to grow, and any growth is completely outside of the grantor’s taxable estate.Those who have previously completed a sale to an IDGT can still benefit from the current market by refinancing their note at a more favorable current interest rate.   

We know this blog may raise more questions than it answers. For more information or to schedule a time to discuss these strategies, please do not wait to contact our office. We are here to help you now, and in the future.

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