This appeared in yesterday’s (10/5) The Wall Street Journal. It’s a great example of an adviser being aware of current rules and thinking outside of the box for the best interest of the client. Staying educated on rules and regs, as well as a good, lasting relationship with your client takes work. Push yourself to be, as the adviser in this article states, a valuable resource to your client instead of just settling for the easy, traditional means of investment management and estate planning.
A Strategy to Avoid Capital-Gains Taxes in GRATs
A woman in her late 80s had previously set up 10 grantor retained annuity trusts to transfer wealth to her two children. Her former adviser had suggested she fund each GRAT with $500,000 in stocks, and then set the GRATs up so that every year for five years, two trusts would terminate, providing the children with tax-free money.
Each year, the woman drew an annuity payment of $220,000 in securities and liquidated the remaining stocks in the terminating trusts to lock in gains and pass the money and gains to her children. Though the gains were shielded from gift tax, as the grantor the woman faced thousands of dollars in capital-gains taxes.
“We immediately saw an excellent opportunity to save this client money and build our relationship with her,” says financial adviser David Weinstock, who started working with the woman in 2013 after four of the 10 GRATs had already terminated. The adviser is a principal at WeiserMazars LLP, an accounting, tax and advisory firm in New York which manages about $200 million for 50 clients.
Mr. Weinstock, who is also a certified public accountant, showed his client that because of the low cost basis of the stocks in the GRATs scheduled to terminate that year, liquidating them after taking the annuity payment would trigger well over $10,000 in capital-gains taxes.
So the adviser devised a plan that could head off the taxes entirely.
He suggested that instead of liquidating the assets, she should purchase the stocks back from the trust, basically swapping cash for the equities. He pointed out that she had more than enough liquid assets to do so, and the stock purchase would accomplish several things.
First, he explained, buying the stocks from the GRAT would provide the same function as selling them on the open market—it would lock in the gains, protecting the assets against any possible market downturn. The client would avoid realizing any capital gains that would have occurred had the stock been sold on the open market.
If she continued to hold the stocks until her death, they would receive a step up in basis when they were passed on to her children.
The client and her children appreciated the suggestion. Mr. Weinstock went on to use the same strategy in 2014 and plans to do the same this year.
Mr. Weinstock notes that when carrying out this strategy, it is important to work with a trusted CPA and attorney who can help carry out the correct timing of annuity payments, stock sales and distributions from the trust.
The adviser says his ability to spot this solution comes from staying abreast of rules and techniques that are outside the purview of traditional investment management.
“As an adviser, if you can, you should always maintain your education in fields related to your practice,” says Mr. Weinstock. “That makes you a resource and adds value to your relationships with clients as well as other centers of influence.”
Source: The Wall Street Journal