Welcome to Talking T&E for Advisors, where Trusts and Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors.

In this video, they discuss the strategy of pairing market volatility with a grantor trust and a well-timed gift:

Read the full raw transcript below:

Susan Lipp: Hello, I’m Susan Lip, Editor -in -Chief of Trust and Estates, and I’m speaking with Jamie Hopkins, CEO of Bryn Maw Trust Advisors LLC, and Chief Wealth Advisor at Bryn MawR Trust.

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Today we’re going to be discussing the strategy of pairing market volatility with a grantor trust and a well-timed gift. The goal is to shift appreciating assets out of the estate while their values are temporarily suppressed.

When values recover, that appreciation happens outside the taxable estate. And this discussion is based on an article by Jack Elder, Gifting into the Dip, which appeared in our September issue.

So Jamie, let’s get started with the questions.

The article highlights market volatility as an opportunity for estate planning? Why does a market downturn present such a powerful window for wealth transfer? And how can advisors prepare clients to act quickly?

Jamie Hopkins: Yeah, well, thank you for the question.

It’s a really important part of strategic gifting and estate planning for high net worth clients. And it’s not just the market downturn. You really wanna think about any time where there might be a depression of value for assets. But most commonly, right, that occurs when we have investable assets and the market turns down. It can happen in privately held businesses too, right? Maybe the business isn’t doing that well that year or something occurred. You could also see a depression of value.

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And the reason you want to think about gifting at that time is the hope is those assets will recover in value or grow over time. So if one of your goals is to transfer these assets from the owner out of their taxable estate. You wanna look for those time periods, markets down, the assets are depressed in value. So you can kinda get them out at a lower dollar amount. And we’ll talk about an example of this to drive it home, but short answer is look for depressed asset values to transfer them during life to keep the taxable estate lower.

SL: Okay, trust, including grantor trust, can play an important role in gifting.

Can you walk us through why timing and using a trust for gifting is so critical?

Jamie Hopkins: Yeah, one of the things in the estate planning world we talk about is getting a grantor retained trust, so where you’re going to continue to pay the taxes as a grantor, but an irrevocable trust set up early. You can make continuous gifts to this over your life and get them out of your estate. The reason in this topic, especially we talk about market volatility and gifting, it’s so important and the timing is so important is because if we have to rush out and try to set up a grand tour, right, irrevocable trust tomorrow to transfer during a dip, by the time we get that trust set up and funded, those assets could have already rebounded. As we’ve all seen, right, We might get a month of a downturn, then all of a sudden, the market takes back off or back up. So having one that’s set up and ready to go to take advantage of these depressed asset values is really important. So you want to get this set up before that market dip occurs or depressed value occurs so that we can act on it right away. It is important to remember though, to get this out of the estate, it does have to be an irrevocable trust. If it’s a revocable trust, it won’t work. There’s other uses for those, but we won’t be able to kind of freeze the value of that transfer at that time.

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Susan Lipp: All right, let’s move on to the question of the step -up and basis.

So one of the challenges of gifting assets during life is losing the step-up in basis at death. How should advisors and families think about this trade off and what strategies like life insurance or swap powers can help mitigate it?

Jamie Hopkins: Yeah, this is one of the big downsides, right? We talk about the upside is transferring something to this depressed value. But, you know, we also have to look at this rule of lifetime transfers have carryover basis.

So let’s use this example we’ll get to here in a second, but I’ve got a $10 million investment asset and maybe I only paid a million dollar short so I’ve got nine million dollars of gain in there. If I give that to my kids today they will take over carry over my basis of one million which still means they have nine million dollars of taxes right of taxable assets in that in that investment. If I were to die though tomorrow and it my kids inherited they would get a step up in basis to to that $10 million and not owe taxes on that kind of spread there.

That’s really important, right? That could be millions and millions of dollars in this situation. And especially if that’s all I own is that one $10 million asset, it is actually a bad strategy to transfer it today, even if there was a dip in the market down a million because, you know, essentially I’m locking in taxes for my kids in that spread versus leaving it at death. Now, how can you deal with this sometimes? We did, you mentioned really quickly, life insurance. We could go purchase life insurance in addition to cover some of that liquidity issue we might have in the future. So if we think maybe there’s $2.5 million of taxes that would be owed on that $10 million asset, we could go buy life insurance fairly lead to fund $2 million, where then we could kind of cover that tax payment with life insurance at a much smaller dollar amount today, maybe a couple hundred thousand dollars in total as a premium. So, that could be one way to mitigate that, you know, almost tax differential in the asset. It doesn’t get rid of the taxes, but it could be a way to minimize that for our heirs.

SL: The article includes a case study of a $10 million portfolio that drops $1 million and then they gifted $9 million during a market dip.

Can you explain the long-term estate tax savings from that example and why is that strategy so efficient? What other assets might make sense to consider in lifetime gifts?

 So this was a great example in the article and it’s, you know, what I would, they kind of mirror real-life examples here where you might have a very high net worth client say 50 to 100 million that does have 10 million of investable assets that they really don’t need to maintain their current lifestyle today. So they have an irrevocable trust set up at this time, and the market has a downturn of 10%. So it goes from 10 million of investable to 9 million. They go ahead and say, you know what, let’s transfer this $9 million right, investable asset into this irrevocable trust. So in the example they transferred in there, and that is using up $9 million of your lifetime exclusion amount. So you do have to remember that it is a taxable gift we use up part of that 16-ish million today and goes in there. Now, when you look at that though, you say, well, was this good or not? It does depend on a lot of assumptions. The article I think assumed a 6% return over a number of years, but that 9 million if you think about that over a 10 plus year time period with 6, 7 percent will double. So all of a sudden the kids actually inherit a $20 million asset or more in the future, but only 9 million of it actually was counted against your exclusion amount.

So you were able to transfer a more than double amount by locking in that transfer early on and getting the dip portion of that, that 10 % down and the future gains of that outside of the estate. That saves in this scenario, right, millions of dollars in estate tax, right, at the 40%. So it’s a very powerful strategy. This is not for everybody, right? That’s the other thing is this example, we are talking about high net worth clients that have millions of dollars that they don’t need access to today. If you needed access to that 10 million dollars today, you can’t transfer it into this trust. You can’t access it. You can’t live off of it. You can’t spend it. It is an irrevocable transfer. So that is a big caveat here. You have to understand the client situation, their long-term goals, but we really should take advantage for our high at worth clients of these kind of estate -freeze techniques to get them out of the estate and save some of those taxes long -term for their heirs.

SL: Okay, last question for you.

What’s the biggest takeaway for advisors watching this? Is it about monitoring markets more closely, preparing structures in advance, or educating clients on how volatility can actually work in their favor.

JH: Yeah, I think this one’s actually simple and it’s the last one. I don’t think we need to watch markets more closely, but most clients get stressed out when the markets are volatile and they’re turning down. And I think if you really take the time to educate clients, market downturns, when we look in the past, always look like such great opportunities. And this is one of those things. If we have these conversations up front that there are things we can do during downturns, right?

Whether it’s tax loss, harvesting, transfers, gifts, these things can have very good long-term benefits for the clients and not just cause stress during a downturn. We can actually use these to be, hey, remember when we talked about this gifting? This is a great time now that the markets are a bit choppy. So we can turn a bad situation, a stressful situation for clients into a positive planning situation. I think that to me, that’s gonna make clients feel so much better when we can actually act on some of these planning conversations during that time period. But your point, if we didn’t educate ahead of time, if we didn’t plan ahead of time, they’re not gonna be receptive to that during a downturn. We have to prepare people for this action well in advance of market volatility.

SL: Well, thank you so much, Jamie, for your insights on this estate planning strategy and it’s such an opportunity to take advantage of the volatility in the market.