Heirs of Ultra-Wealthy can Profit Even When Markets Plunge

The coronavirus is causing a panic worldwide and it is being felt domestically by the plunging stock market. Though many people are worried about the downward spiral of stocks, the super wealthy, or 0.1% of Americans, see it as a glimmer of hope in these dark times. 

The rich and their advisors take a longer-term view of market volatility because their beneficiaries are future generations — some who haven’t even been born yet. “They have more money than they could ever spend,” Ali Hutchinson, a senior wealth planner at Brown Brothers Harriman, said of her ultra-wealthy clients. “Even though this volatility could go on for months, they’re not thinking about it in that short-term way. The smart ones are using it as an opportunity.” When stocks and interest rates are lower, the Internal Revenue Service cannot tax their wealth at the same level as before the dips, making it easier to pass money to the next generation tax-free. “You could almost say it’s a perfect storm for wealth-transfer planning,” said David Stein, a partner on the private client and tax team at Withersworldwide.

A Grantor Retained Annuity Trust (GRAT) is also an option that shows much more promise during times of damaged stocks. A wealthy family will put a stock or other asset in a GRAT, a transaction that is technically a loan. If the stock rises in value, those proceeds go to beneficiaries tax-free. If the stock drops, there’s no harm done and the shares just go back to the donor. The IRS requires that trusts pay interest back to the lender, the taxpayer that set up the GRAT. The rates, which are set by a formula and published each month, are a hurdle that GRAT investments must clear in order for returns to flow to beneficiaries. Stein expects the IRS’s April rate could drop to about 1.2% or even lower.

See Ben Steverman, Heirs of Ultra-Wealthy can Profit Even When Markets Plunge, Financial Advisor, March 6, 2020.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) and Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.