Estate Planning in a Down Market

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A rolling GRAT strategy allows multiple possibilities of catching the asset's rise at a valuable moment. GRATs have a standard structure, so setting up the second or third one is less expensive than the first. (A simple GRAT might cost about $5,000.)

"There is no downside to doing a GRAT," says Sharon Nelson, a trusts-and-estates attorney at Foley & Lardner in Chicago. "If the assets appreciate at a higher rate than the IRS's hurdle rate, the beneficiaries win. If it fails, you don't lose anything. You didn't use up gift tax doing something that didn't work."

For those who keep rolling assets from one GRAT to another, today's market swings, the bane of investors, are positive. "Volatility in the market is a wonderful thing in GRATs," says Michael Gooen, chairman of trusts and estates at law firm Lowenstein Sandler in Roseland, N.J. "You constantly have these cascading GRATs. Because you lose nothing from guessing wrong and stand to gain a lot from guessing right, you want to guess as many times as you can."

The best assets to put in a GRAT are liquid (since the trust needs to make those payments to you) and focused within one asset or industry—say, one stock or stocks within the same industry. "A financial adviser will say to a client, `Make sure you are diversified.' In a GRAT, it's the reverse," Nelson says. "While you want your overall portfolio to be balanced, your GRAT should be very concentrated." That's because if you have three stocks in a GRAT and two go up and one goes down, the trust might fail overall. But if you have three GRATS, each with a single stock, the one that goes up will succeed regardless of how the other two perform.

Who should use GRATs? Those who think there's a good chance they'll have accumulated more than $3.5 million by the end of their lives. As with other estate-planning techniques, the best time to be considering this is when you're in your 50s. That's because you can expect more appreciation over the long term and because if you die before the GRAT's term ends, the assets in it become part of your estate.

Another good strategy in these low-rate times is to lend money to your kids on the cheap. For short-term loans—up to three years—the IRS's rate for intra-family lending is now just 0.81%, and the loans can be structured as interest-only, with a balloon payment at the end of the term. (There are somewhat higher rates for medium- and long-term loans.) Those rates are at historic lows. While the likely main reason to do this is personal (helping an adult child buy a house at terms better than any bank would offer, for example), it has benefits for estate planning. If your kids earn more than the IRS's rate on the funds you've lent them, they keep those gains tax-free. "There are clients who are otherwise reluctant to give gifts," says Lowenstein Sandler's Gooen. "They want to save gift exemptions or have already used them. For those folks, the concept of a loan works great with rates as low as they are."

Amy Feldman is an associate editor with BusinessWeek in New York.