As financial advisors, we’re no strangers to the roller coaster of market volatility. This week's sell-off is a stark reminder of how quickly market conditions can change and the need for proactive planning. Amidst this turbulence, estate planning is one area where advisors can truly add value. This often-overlooked aspect of financial planning becomes crucial when markets are volatile, offering unique opportunities to secure your clients’ legacies and provide them peace of mind.
FOMO is real, and missing out can also be expensive. During periods of extreme market volatility, advisors should consider certain estate planning opportunities that are (almost) too good to be true for their clients. This includes grantor-retained annuity trusts (GRATs). It can be overwhelming for advisors to know where to begin when it comes to estate planning. Let me explain how this simple strategy can work for your clients and how leveraging technology can help you make lemonade out of lemons.
GRATs in Action
The CBOE Volatility Index, also known as the VIX, spiked earlier this week. The last time we saw a spike like this was in the early days of the pandemic and the height of fear in 2008. We all know what happened after that. GRATs capitalize on volatility, and any return above the 7520 rate (set by the government as 120% of the AFR each month) can be passed to a trust outside of a taxable estate. Every dollar that ends up in that trust can escape the 40% estate transfer tax, plus grow tax-free in a grantor trust, and all of that growth also avoids the 40% tax.
Using the simplest examples, one can see that opportunities are missed if market changes are ignored. In a GRAT strategy, an asset is exchanged for an annuity within a trust established by the grantor. In a simple example, the grantor might establish a two-year GRAT by putting $1 million worth of a single stock into a trust. Over the term of the GRAT, the grantor is due back the lesser of the value of the GRAT or the initial $1 million contribution plus a small amount of interest (the 7520 rate).
To illustrate the point, let’s assume a very volatile stock is valued at $10 per share on the date of its contribution to the GRAT, and the grantor does not want to sell the stock. Next, suppose that during the two-year term, the stock appreciates to $20 per share, then falls to $2 per share, then rises again to $20 per share before the end of the GRAT term, where it settles back in at $10 per share (the example ignores the 7520 rate for illustrative purposes).
If you do nothing, the GRAT will mature without transferring any assets out of the grantor’s estate because the value equals the original contribution at the end of the term. However, a vigilant, savvy advisor would use a few simple steps to capitalize on the volatility of the stock. This can be accomplished by substituting a low-volatility asset for the stock and re-GRATing the stock in a new GRAT. One can lock in gains before the end of the GRAT term and still enjoy further appreciation. The same technique could be used to “reset” a GRAT that is likely to fail if the GRAT is too far below the initial contribution.
Using our hyperbolic illustration, the savvy advisor moves almost $2.8 million to the next generation without tax, while the less proactive approach yields $0. This technique can be repeated over and over, capitalizing on the movement of the asset price. And remember, this is the most basic example of the sophisticated estate-planning opportunities a skilled advisor can deliver.
For clients with taxable estates, capitalizing on concentrated positions in periods of volatility can add value in the face of otherwise negative news. This approach can be had with any investment that enjoys volatility, including an equity index that an investor already owns. Think of every estate-taxable client that owned NVDA over the last few years and the opportunities missed.
Using Tech to Show Your Value
Amidst the challenges of bear markets, there is also opportunity. The current climate is the perfect chance to show the value you can bring beyond managing your client’s stocks, bonds and funds. It’s a time when you can further cement your relationship with your clients as a trusted advisor who is there for the long haul—for this generation and the next. Helping your client build their legacy means understanding their core values, relationships, hopes and fears, looking beyond your client’s lifetime to how they will shape the future of generations to come.
Estate planning provides a safety net for families, ensuring they are cared for regardless of market conditions. It helps protect assets from unnecessary taxation and ensures their smooth transfer to heirs. This planning is even more crucial in volatile markets, as it offers a sense of security and continuity. Incorporating technology into estate planning revolutionizes how advisors can manage and present these plans to their clients. Demonstrating the full spectrum of your advisory capabilities, including estate planning, can deepen client relationships and showcase your commitment to their long-term financial well-being.
Leveraging technology for estate planning can significantly enhance an advisor’s value proposition, especially during market downturns. It can enable advisors to manage complex estate planning processes efficiently, offering clients clarity and confidence in their financial futures. These platforms simplify document creation and update processes and provide visual aids that help clients understand their estate plans more thoroughly. This enhanced understanding can be particularly reassuring during volatile periods, as clients see concrete steps being taken to protect and grow their assets.
Furthermore, technology allows advisors to maintain continuous engagement with clients. Instead of estate planning being a one-time event, these platforms facilitate ongoing updates and reviews, ensuring that the estate plans remain aligned with clients' evolving goals and market conditions. This continuous engagement helps advisors demonstrate their long-term commitment to their client's financial well-being, reinforcing their role as trusted partners during uncertain times.
During these crazy financial times, don’t miss out on opportunities for your clients and yourselves.
Steve Lockshin is the co-founder and non-executive chairman of Vanilla and a founder and principal of AdvicePeriod.
