Freeze That Estate!

Treasury bonds yield so little that you would think we're expecting less inflation, not more.

Here's the upside: As today's Wall Street Journal points out, this is an awesome time for the wealthy to practice estate-freezing techniques like GRATs and CLATs:

Fiduciary Trust started talking internally in December about the especially good opportunities for estate-freeze strategies, says [Sharon Klein, trust counsel and director of estate advisement]. Since then, the company has been talking up the idea with clients.

The Advice Lab of JPMorgan Private Bank at J.P. Morgan Chase & Co. has also weighed in. The lab recently issued an update to clients titled "Turning Lemons Into Lemonade: Using Planning Strategies to Take Advantage of the Current Market Environment." It outlines grantor-retained annuity trusts, or GRATs; charitable lead annuity trusts, or CLATs; intrafamily loans and family partnerships, another strategy.

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Using an intrafamily loan -- in a hypothetical example from JPMorgan -- a person could lend $1 million to a child, locking in the March fixed short-term AFR of 2.25%, the midterm rate of 2.97% or the long-term rate of 4.27%, depending on the period of the loan.

If the child invests the $1 million over five years at a 10% annual rate of return, she will be able to keep any returns over the mid-term AFR of 2.97%.

The child would keep about $430,000 and pay no gift tax while realizing an estate-tax savings of about $215,000, and the parent would get back the original $1 million plus a 2.97% return.

A GRAT -- in another JPMorgan example -- would allow one to transfer $5 million in stocks to a beneficiary for a given term, say five years. The GRAT returns a fixed annual payment over the term; in this case, it's designed so that the present value of payments, calculated on the 3.6% hurdle rate for this month, equals the initial $5 million.

No gift taxes are due because the assets transferred in the GRAT aren't considered a gift.

If the stock in the GRAT returns to its high at the end of the first year, and then grows at 10% each year for the remaining four years, trust assets at the end of the five years will have grown well beyond the 3.6% rate. About $2 million would be transferred to beneficiaries, such as children or a family trust.