Estate Planning Strategies During Volatile Markets

Estate Planning Strategies During Volatile Markets- If timed correctly, a short-term Grantor Retained Annuity Trust (GRAT) is something to be considered when markets are bumpy, says a recent article from mondaq, “Estate Planning Amid Market Volatility: Leveraging GRATs.”

If investments have dropped in value, they can be transferred to a GRAT. If the investment returns to its original value, the difference between the value at the time of transfer and the long-term value could pass to the next generation without incurring any gift tax. This is not a guaranteed event, requiring steel nerves and patience. However, it could reap significant benefits.

Short-term GRATs can be used to transfer income appreciation in investments to offspring at a low gift tax cost. What characterizes a short-term GRAT? It has a stated term of two to four years, and during that time has an obligation to pay the funder the retained annuity. When it ends, any property remaining in the trust is distributed to the children with no gift or estate tax. If you die before the end of the trust, the remaining property reverts to your estate.

The goal of this strategy is to let children receive investment returns on property more than a stated IRS interest rate. Since the beginning of 2023, this has fluctuated between 4% and 6%. If the funds in the trust generate a total return higher than the IRS rate, the children could receive the excess return. If the property doesn’t return at least the IRS rate, all the trust assets are repaid to you. The children may not have received anything from the trust. However, there’s no loss to them.

Estate Planning Strategies During Volatile Markets

If you made a gift of the property and then the property lost value, you’d have paid gift tax at a value higher than what was received by your heirs. The same would be true if you made a loan to your children and they either had losses or didn’t achieve a return equal to the minimum IRA rate, as they would owe the principal amount of the debt.

Here’s an example let’s say you transfer $1 million in assets to a two-year GRAT, and the children invest the funds, earning a 6% annual return. At the end of two years, they’d get a tax-free gift of about $50,000 to $80,000.

You’d transfer $1 million to the trust, and the trust would promise to pay $510,000—$530,000 at the end of the first year (depending on the IRS interest rate), and an additional $510,000—$530,000 at the end of the second year. The annual payments are your “retained annuity.”

There is a small taxable gift at the time the trust is established. If the trust had promised a smaller amount, there would have been a bigger gift when it was established. If the trust earns 6% during the first year, the net value is $1,060,000. The trust would pay you $520,000. The remaining $540,000 would be invested for the second year, earning a 6% return of $32,400. At the end of the second year, the trust would have $572,400, and you would be owed the second annuity payment of $53,000.

The GRAT is deliberately limited to two years to avoid offsetting gains against losses. If the trust had a six-year life span and experienced 12% gains in the first two years, then a loss in years three and four, and then gains again in years five and six, with the bad years offsetting the good years, the amount payable to your children would be reduced.

By establishing a new trust every two years, it’s more likely you’ll capture the gains in good years. The short term also increases the chances of your not dying during the term of the trust, which would undermine any gains.

This strategy is not suitable for every investor, since it involves risks. Talk with your estate planning attorney to see if it might be something to benefit you and your family.

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Estate Planning Strategies During Volatile Markets

Reference: mondaq (June 12, 2025) “Estate Planning Amid Market Volatility: Leveraging GRATs”