Silver Lining Playbook: Wealth Planning Through Volatility

March 17, 2020
Senior Wealth Planner Alison Hutchinson explores time-sensitive and beneficial wealth planning strategies to consider amid the current volatility.

At BBH we are advising clients to be patient investors, reconfirm investment goals and remember what the wealth is for. We are counseling to keep in mind the difference between the current price and the value of the companies we own and to trust BBH and other advisors to help preserve wealth during this time. While we believe it is prudent to stay the course in terms of investment portfolios, it also makes sense to consider implementing some of the following extraordinary, but time-sensitive planning opportunities you can take advantage of today, from home.

  1. GRATs: low hurdle rates make it more likely that a GRAT will succeed in transferring wealth tax-free (described in detail below).
  2. GRATs: volatility requires vigilance. We will discuss in our next update best practices for planning with GRATs that are “underwater” (in other words, GRATs that are not expected to beat the relatively higher hurdles that were likely in place when they were funded in 2018 or 2019).
  3. Loans: Low interest rates present exceptional planning opportunities for wealth transfer.
  4. Gifts: Simply transferring assets down a generation or more while those assets are are priced lower than intrinsic value is the gift that keeps on giving.
  5. Fiduciaries: Review fiduciary appointments and identify succession plans for any high-risk individuals; similarly review the estate plans for any high-risk family and friends.

Executing on any of these ideas will require legal advice. These ideas focus on tax savings and, while impactful, must also be aligned with your goals at the intersection of family, wealth and philanthropy. Transfers should not be made for tax savings alone, but only if they contribute to your broader values-based wealth plan. If you would like to hear more, please contact your BBH Relationship Manager or Wealth Planner, who all remain active, engaged and involved whether at the office or at home.

Grantor Retained Annuity Trusts

There are two reasons to think about GRATs today: (1) low interest rates flow through to GRAT “hurdle” rates (described in detail below) which increases the likelihood of a successful GRAT and (2) volatility in an existing GRAT program requires vigilance in looking for freeze opportunities.

What is a GRAT?

GRAT stands for grantor retained annuity trust. In general, GRATs are used to minimize federal estate and gift tax.
To create a GRAT, someone (the grantor) makes a gift to a trust. The trust agreement says that the trust will last for a certain number of years – by way of example, assume two years. The trust also says that the trustee has to pay an annuity back to the grantor (this is the “grantor retained annuity” part of the trust) over two years. After two annuity payments back to the grantor, anything remaining in the trust passes to a trust for the grantor’s descendants.

The grantor makes a gift to his descendants on the day he creates the GRAT, since the lucky descendants are entitled to get something (the GRAT “remainder”) after the two-year term of the trust. The value of the gift is the value of what the grantor put in the trust less the value of what he is required to take back through the annuities, since that is what the descendants are anticipated to receive. Most modern estate planning attorneys structure GRATs so that the value of what the grantor puts in is roughly equal to the value of what he is required to take back, plus a “hurdle” which the IRS sets each month (similar to the rates for intra-family loans described above). If the assets in the trust appreciate at a rate greater than the hurdle, descendants receive assets transfer tax free. This is sometimes referred to as a “zeroed-out” GRAT because the value of the gift is deemed to be zero.

Why Now?

The hurdle rate mentioned above is remarkably low for GRATs funded this month and is projected to go even lower, potentially as low as 1%, for GRATs funded in April. Appreciation above the hurdle passes to descendants in this example transfer-tax free. If the assets in the GRAT do not beat the hurdle rate, there are no negative tax consequences; the GRAT will just be fully depleted by making payments back to the grantor, and there will be nothing left to pass to the next generation at the end of the GRAT term.

Below is an example of a two-year GRAT funded with $2 million in the low-interest rate environment we experienced in January, 2013, when the hurdle rate was 1%.

The annuity amount in each case is calculated by paying just enough back to the grantor so that the value of the interest the grantor retains plus that low hurdle of 1%, is equal to what was put into the trust. If the value is equal to what was put in, then the “gift” to remainder beneficiaries is nothing, because using accepted IRS growth rates (again, very low at 1%) the anticipated amount to pass to the remainder beneficiaries is zero. These are commonly called “zeroed out GRATs.”

For illustrative purposes, we ran two scenarios, one assuming 3% growth and one with 7% growth.

Year 1 $2,000,000.00 $60,000 $923,147.80 $1,136,852.20
Year 2 $1,1136,852.20 $34,105.57 $1,107,777.20 *$63,180.57
Year 1 $2,000,000.00 $60,000 $923,147.80 $1,136,852.20
Year 2 $1,216,852.20 $85,179.65 $1,107,777.20 *$194,254.65

*The highlighted number in each example above is the amount passing to the GRAT beneficiary after two years, free of transfer tax or use of exemption, assuming the grantor survives the term. The GRATs were “zeroed out” as explained above, so no gift tax was due. The annuity in year two increases by 20%, which is permitted under the IRS regulations and leaves more in the GRAT in the first year to grow which makes it more likely that the GRAT will succeed in beating the required IRS hurdle.

You may be thinking that the above picture looks much too rosy for the financial turbulence we are currently experiencing. Today, 7%, 3% or even 1% appreciation would feel like a welcome change to the precipitous drops we have seen over the past couple of weeks. Indeed, for those who funded GRATs before the volatility, it is extremely important to consider whether they may be unsalvagably underwater. In that case, the appropriate strategy is not to cross your fingers and hope the GRAT recovers; rather, it is much more prudent to cut your losses and start anew. We will examine when it makes sense to give up on a failing GRAT in the near future.

Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.  This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.  This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products.  Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented.  This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH.  All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020.  All rights reserved. PB-03411-2020-03-16

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction