Wealth Planning Q&A with Dan Lindley
As part of our GFO Pulse Q & A series, Jane Flanagan, Director of Family Office Consulting, sat down with Dan Lindley, Fiduciary Practice Executive, to discuss some of the interesting wealth planning strategies that Dan is seeing GFO clients consider in these uncertain times.
Jane: So Dan, what are some of the things you’re hearing from clients?
Dan: When it comes to wealth planning, we’re seeing resurgence in the techniques that families have used over the past two decades but especially in the wake of the financial crisis of 2008 and 2009. Across the economy, asset values are depressed, and interest rates are very low. These kinds of conditions tend to generate more activity with Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs).
GRATs are designed to transfer excess investment return out of the grantor’s estate, with a minimal or even zero gift tax. GRATs are funded with assets that are expected to appreciate substantially in value; the assets are placed in an irrevocable trust that requires fixed annual payments to the grantor for a certain number of years. With the depressed asset values that many investors are experiencing, there should be some good opportunities for contributing assets into a GRAT. The idea is during that term of the GRAT, any increase in value will benefit the remainder beneficiary.
“When it comes to wealth planning, we’re seeing resurgence in the techniques that families used over the past two decades but especially in the wake of the financial crisis of 2008 and 2009.”
This technique is all the more powerful in our current low interest rate environment because a low interest rate (or discount rate) applied to value the assets transferred to the GRAT will result in a smaller (or no) taxable gift at the inception of the GRAT. At the maturity of the GRAT term, the remainder of the assets is paid to the designated beneficiary (typically a child), either outright or in a lifetime trust, and usually coupled with a general power of appointment in favor of the beneficiary.
We are also seeing interest in Intentionally Defective Grantor Trusts (IDGTs). It’s a similar concept, where a sale of high growth/high income assets from the grantor to a trust will limit the future market value of taxable assets in the grantor’s estate, and transfer the excess return from the assets over to trust beneficiaries. Unlike a GRAT, an IDGT is well suited to use a multi-generational trust to purchase the asset from the grantor. And rather than an annuity payment, the grantor will receive a promissory note equal to the purchase value of the assets, with interest at the current AFR for the corresponding term of the note.
Jane: Thanks Dan. So you’re seeing families using these well-known tools to make the most of the down market and pass value to the next generation. This is a great reminder for everyone as they look for opportunities in the midst of uncertainty.
This brings me to another question for you: we know that a lot of families are holding high levels of cash today. What planning opportunities do you see for this cash?
Dan: An option we see some families exploring is similar to the notion of a “Family Bank”, where a family uses its cash to make loans to family members at low interest rates, as opposed to using a more traditional lender. A simple example would involve a family lender making a low-interest loan to a family member who uses the loan proceeds to pay off a mortgage with a much higher interest rate.
Similarly, if a family member wants to make an investment, or perhaps pursue an entrepreneurial venture, but does not have the borrowing ability or perhaps the finances to afford a market rate loan, the family lender could consider providing a loan at a much lower rate.
The advantage here is that the family borrower has much reduced debt service. In addition, like the way the IDGT works, if the investment pays off handsomely, the family lender will have helped create wealth roughly equal to the gain over the principal amount of the loan. There is a further wealth transfer angle to an intra-family loan: the family lender has the ability to forgive interest payments or principal by applying annual gift tax exclusions or by utilizing any available lifetime exemption amounts.
“An option we see some families exploring is similar to the notion of a ‘Family Bank,’ where a family uses its cash to make loans to family members at low interest rates.”
There are a couple of caveats with intra-family loans. First, the interest payments will constitute taxable income to the family bank. Second, any such loan must bear interest at or above the AFR rate for the appropriate term of the loan.
Jane: This is really helpful, Dan. The idea of the family bank is something that we’re often asked about, and you’ve given us some great examples of ways that GFO families can be opportunistic with planning in these uncertain times. Before we leave today, what is one piece of advice you would like our readers to consider?
Dan: If you’ve got unused federal and state lifetime transfer tax exemptions, this is a great time to use them. We know that in 2026, once the current tax law lapses, the federal lifetime exemption amount is being rolled back. Effectively this means you either use the exemption or lose it.
Jane: Dan, thank you very much for your time and your perspective. For our readers, we invite you to review the following resources to learn more.
To Learn More, Contact:
David C. Albright, Head of Client Development – Americas, EMEA & APAC Regions, 312-557-1900 or DCA2@ntrs.com
Jane Flanagan, Director of Family Office Consulting, 312-557-2025 or JPF7@ntrs.com