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Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage

April 9th, 2020

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Below is the second piece in our "mini-series" on strategic and planning opportunities during stressed market conditions. This piece focuses on Estate Planning and Strategic Uses of Debt. Future items will highlight Social Security timing/claiming, information on the CARES Act (the recently-passed stimulus package related to the coronavirus) and both our normal as well as additional market commentary.

Estate Planning, Asset Location & Income Strategies

External events that cause reflection are good reminders to update estate planning documents. Clients should reach out to their attorneys to review and update beneficiaries and named fiduciaries (personal representatives, executors, trustees and/or guardians), financial and healthcare powers of attorney, wills and trusts. In addition, clients might want to consider the following strategic estate planning structures in the current environment:

  1. Intentionally Defective Grantor Trust(s) ("IDGTs") – Gifts to grantor trusts for non-grantor beneficiaries can be a highly-effective way to move future-appreciating assets out of one’s estate at currently-lower values. IDGTs are irrevocable trusts that are structured to be “intentionally defective”. This allows contributed assets to appreciate outside the grantor’s estate, while the income the trust assets produce is taxed to the grantor as opposed to the trust. External appreciation allows/requires the grantor to use non-trust assets to pay the trust’s income taxes, which equates to a tax-free gift to the beneficiaries of the trust while reducing the grantor's estate. IDGTs allow trust assets to grow free of tax, which can create additional appreciation opportunities for trust beneficiaries. IDGTs are often favored by owners of real estate, closely-held businesses or highly-appreciating assets who are or will likely be exposed to estate tax;

  2. Grantor Retained Annuity Trust(s) (GRATs) – GRATs allow asset owners to place assets irrevocably in trust for the benefit of others while receiving fixed annuity payments for a period of time. GRAT beneficiaries benefit from the difference between excess trust investment return and the annuity payment(s) to the grantor. GRATs can be especially effective techniques when low asset values and/or interest rates are present, as the “hurdle rate” of the annuity payment is lower and the price appreciation potentially-greater. GRATs tend to be favored by asset owners with estate tax exposure who would like to transfer assets out of their estate while retaining access to cash flow from those assets during their lifetimes.

Strategic Use of Debt

One of the core principles of our firm and practice has consistently been to advise clients to reduce their personal and business debt when possible. We do this for a few simple reasons. First, because we are fiduciaries and believe it to generally be in our clients’ best interests. Second, because debt repayment represents an absolute and/or risk-adjusted rate of return that is often comparable or superior to available savings rates or bond yields. Finally, because when one owes money to others, they are in effect dependent on the kindness of that stranger and when times get tough, strangers might not be so kind (credit to Warren Buffett). However, well-capitalized clients might be able to use debt to their advantage in the current environment. Here are a few examples of how:

  1. Mortgage Refinancing – While mortgage rates have recently moved back up from lows, the Federal Reserve’s move to put the Fed Funds Rate at between 0-0.25% and inject massive amounts of liquidity into the financial system makes it more likely that interest rates will be lower for some period of time. Clients with longer-term debt may seek to refinance at attractive rates and/or terms.

  2. Opportunistic Lines of Credit – Clients may seek to open or tap available, lower-rate lines of credit for investment opportunities, wealth transfer, additional liquidity, and more.

  3. Low-Rate Intra-Family Loans – Loans between family members, when structured properly, can be made at below-market, IRS-sanctioned interest rates. If correctly structured, the IRS considers these to be arms-length transactions and does not impose gift tax consequences to the lender.

  4. High-Rate Intra-Family or -Entity Loans – While family members or related entities typically seek to reduce the interest rates they charge each other on loans, in a low-rate environment for fixed income investments the opposite may be true. Structured properly such loans from one family member or entity to another might charge a higher but tax-appropriate rate, creating “synthetic fixed income” cash flow for the borrower while avoiding gift and/or income tax.

Please let us know if you would like to discuss any of these or other strategies. We have worked with our clients and their tax and legal advisors on many such structures, including recently.

Not all of the strategies outlined herein will be applicable for every individual client. Resonant Capital Advisors does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Resonant Capital Advisors, LLC (“Resonant”) is an SEC registered investment adviser located in Madison, Wisconsin. This newsletter is limited to the dissemination of general information pertaining to Resonant’s investment advisory services, and should not be construed as the provision of personalized investment advice. Investing involves risk, including risk of loss. This newsletter contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”) which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. For additional information about Resonant, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site ( Please read the disclosure statement carefully.