What The Wealthy Are Doing With Their Estate Planning During the COVID-19 Crisis

Given the impact of COVID-19, many wealthy Americans are looking for unique estate planning opportunities. When it comes to estate planning, timing is everything which is why many wealthy individuals are considering the Grantor Retained Annuity Trust or a GRAT during the COVID-19 crisis. GRATs are a great technique for passing appreciation to the next generation with little to no gift or estate tax consequences. GRATs will prove to be a very powerful tool during this crisis. 

How the GRAT Works

The grantor will take annuity on the anniversary date throughout the life of the trust. The amount of the annuity payment during the term of the GRAT is calculated using an interest rate determined monthly by the IRS called the section 7520 rate. The section 7520 rate is why the GRAT is a great estate planning strategy during these uncertain times. The rate in May is .08%, which is considerably low, given a year ago the rate was 3.2%. Therefore, if the trustee’s investments outgrow the rate, the beneficiaries will benefit from the GRAT. 

Risks Involved

It is not uncommon for GRATs to fail and there is no guarantee that it will work. If your stock underperforms in relation to the rate, the grantor will typically retain the assets from the trust and the beneficiaries will no receive anything. Therefore, in order to be successful, Grantors need to make sure they choose investments with strong appreciation potential.

It is also important to note that wealthy individuals need to be aware that while assets are in the GRAT, the grantor will still need to pay income taxes due on them. 

Given the current timing today, the low 7520 hurdle rate, and the potential for strong market returns in the next few years, this is the perfect environment to engage in this type of estate planning. 

See Megan Gorman, What The Wealthy Are Doing With Their Estate Planning During the COVID-19 Crisis, Forbes, May 9, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.