Self-help and “coaching” gurus promote the thought that in bad times there are a myriad of opportunities, if only people would look for them. They tell us that most people freeze in times of uncertainty, when instead we should be looking for prospects that might not be here several months or years from now.
Do you think General Electric is a solid company that will be around for decades? It’s currently trading at a price that is approximately 25% of its 52 week high. Will it rebound to its high in the near future? Most would tell you that scenario is unlikely. But could it double in value sometime in the next couple of years? If it did that would still be 50% below its 52 week high.
How about that waterfront home or condominium? Current sales prices are about half of the value they were not too long ago. They can always build more golf course communities but they can’t create any more waterfront. In fact, with the increased environmental and building regulation in place, many would say that if you want to own waterfront property what’s out there is all that there will ever be.
Estate planning is no different. If you have a child or a grandchild who will need money for college, and have funds available you plan to give, why not establish a 529 fund now? With the 5 year carry forward option a husband and wife can together put $130,000 of tax free gifts into a 529 college fund for a child or grandchild at one time. While this consumes five years of tax free gifting to that specific beneficiary, by putting the money into the plan now, and assuming a market recovery some time before the child hits college, the returns on that money might be enormous.
Assuming an average eight percent rate of return on the $130,000 money over the course of ten years that money will have grown to $280,660. If a ten percent return is achieved, it grows to $337,187. While today those returns seem like “pie in the sky” remember that coming out of recessions the stock market often achieves some of the highest rates of returns.
What about reducing your estate tax? With values low on stocks and real estate, now is the time to consider advanced estate planning strategies. Many estate planning strategies “freeze” the value of the assets at the time of the gift, even if the ultimate transfer doesn’t occur for many years. Examples include the use of Qualified Personal Residence Trusts, Grantor Retained Annuity Trusts, Family Limited Partnerships and Irrevocable Life Insurance Trusts, to name a few.
Remember that the estate tax is really a “transfer” tax. The tax is imposed on the value of the estate. It is a tax on the transfer to your loved ones. When you use certain types of estate planning trusts and other vehicles to achieve a transfer at today’s rates, you achieve a freeze on the value at today’s prices. With many of these techniques the appreciation benefits your loved ones, and can be excluded from your estate for federal estate tax purposes.
Take the Qualified Personal Residence Trust example I mentioned above. Those of you who enjoy two residences, one perhaps here in Florida and another residence such as a lake house up north might want to consider this strategy, particularly if the lake house is viewed as a family treasure that will last for generations.
Assume that you are 75 years old and own a lake house that used to be worth $900,000 but would appraise at $450,000 today. Using today’s low AFR interest rates (the rates that the IRS uses to calculate the amount of gift that is transferred with QPRT) a 7 year QPRT results in a taxable gift of only $255,587. In other words, you have gifted a property that was once worth $900,000 from your estate and have consumed only $255,587 of your transfer tax exemption.
If the property were to appreciate at the rate of five percent annually over the life of the QPRT, it would have grown in value to $633,195. The estate tax savings could be close to $200,000. This would happen all because you decided to act when everyone else was frozen.
If you are like me and have faith that these bad times won’t last forever, then you might want to consider taking a fresh look at the opportunities surrounding you.
©2009 Craig R. Hersch