Estate Planning in a Bear Market

Estate Planning in a Bear Market

Lower interest rates mean that income interests may be under-valued, while remainder interests and annuities may be over-valued, which means that QPRTs are less attractive while GRATs, CLATs, private annuities, SCINS, and installment sales are more attractive.

Meanwhile, stagnant or uncertain stock values make all kinds of transfers (including simple gifts) much riskier.


Many interest rates are at or near record lows again because of cuts in the federal discount rate by the Federal Reserve Board. Most importantly for estate planning, the section 7520 rate is near its lowest level in history at 2.4% for the month of January and 2.0% for the month of February.

The lower section 7520 rate means that future interests are worth relatively more while present interests are worth relatively less. Income interests are therefore worth less, while remainders and annuities are worth more.

And uncertain prices make almost all estate planning more of a gamble. Most estate planning transactions are based on the assumption that assets such as stock will be worth more in the future (or at least not worth any less). For example, any strategy designed to freeze the value of an asset in an estate is useful only if the asset goes up in value. It’s counter-productive to freeze the value of an asset in an estate when the value of the asset is falling.


How do lower interest rates and uncertain market values affect some specific estate planning techniques?

UNIFIED CREDIT GIFTS – These are usually recommended in the belief that values will go up (or income will be accumulated), so that the present gifts will remove future growth and income from the donor’s taxable estate. However, these lifetime gifts can be a tax disaster if values go down because (for example) you may have used the $1,000,000 unified credit exclusion to remove assets that are worth only $800,000 at death. So whether unified credit gifts make sense now depends on whether you are an optimist or pessimist. If you are an optimist and believe that the market will rebound, now is a great time to make gifts because values are low and will go up. If you are a pessimist, then you see the danger that prices will go down and not up.

INSTALLMENT SALES – Intra-family installment sales suffer from a good new/bad news split personality. The good news is that low applicable federal rates means that younger family members can buy assets from older family members with very little interest required under IRC section 7872. The bad news is that an installment sale carries the same valuation risks as lifetime gifts, because the younger family members will have over-paid for the assets if the values go down instead of up.

GRANTOR RETAINED ANNUITY TRUSTS (GRATs) – Now may be a good time for GRATs. A low section 7520 rate means that annuity factors are higher, which means that a smaller annuity can be used to zero out the remainder value (assuming that the decision of the Tax Court in Walton v. Commissioner, is good law). Smaller annuity payments to the grantor should increase the chances of the GRAT having value for the remaindermen at the end of the term. There is the risk that the GRAT will not earn more than the section 7520 rate and so all the assets will end up back in the estate of the grantor, but that only means that the grantor is back where he or she started. So, if you bet that the market will rebound and you’re right, substantial values can flow to the remaindermen, but if you’re wrong, all that is lost is the cost of setting up and administering the trust.

CHARITABLE LEAD ANNUITY TRUSTS – For similar reasons, now may be a good time for charitable lead annuity trusts. The lower section 7520 rates and larger annuity factors mean that the charitable annuity payments can be smaller, which increases the chances that the CLAT will have value for the remaindermen at the end of the term.

PRIVATE ANNUITIES – Now may also be a good time for private annuities. The low section 7520 rates and resulting higher annuity factors mean that younger family members can purchase assets from older family members with smaller annuity payments. (But there is still the risk that those assets might go down in value and not up.)

SELF-CANCELING INSTALLMENT NOTES – Regardless of whether a SCIN should be valued as an installment note (based on applicable federal rates) or like a private annuity (based on section 7520 rate), now may be a good time for SCINs. If you think of a SCIN like an installment note then, like other kinds of installment sales, the SCIN can charge a lower interest rate with lower payments for the payors (usually the younger family members). If you think of a SCIN like a private annuity, then the higher annuity factors also mean lower payments for the payers.

QUALIFIED PERSONAL RESIDENCE TRUSTS – Now is NOT a good time for QPRTs, because the lower section 7520 rates put a larger value on the remainder interest that is the taxable gift. For example, a ten-year QPRT for a $500,000 residence results in a taxable gift of $289,955 using a section 7520 rate of 5.6% (ignoring a retained reversion), while the remainder in the same trust of the same residence had a value of only $244,865 one year before, using a section 7520 rate of 7.4%, a difference of $45,000.

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