That means, he said, it might be a good time to consider a SLAT or a similar trust structure if markets swoon in December. But because different assets usually decline at different times and rarely in tandem, there’s almost always something worth considering for placement in a trust.
Declining asset values are particularly relevant to high-net-worth clients.
“This is a big opportunity for closely held business owners, investors in real estate and investors in hard-to-value assets,” said Cain. “In some cases, the valuation of these assets can be significantly reduced because there is no publicly [traded] market for them. So think about minority stakes in businesses and other investments where you’re not going to be transferring control. Also, if I own a closely held business and my sales are going up and I’m thinking about hiring more employees or expanding, and private equity funds are sniffing around—it’s a fantastic time to consider a trust because I can transfer the ownership stake, have it grow and mature in a trust and it would never be subject to estate taxes.”
Low Intra-Family Lending Rates
With interest rates remaining close to their historic lows, the intra-family lending rate has hovered near 1%, said Cain.
“Families can now shift opportunities down to their children or grandchildren with trusts by funding the trust with a low-interest-rate loan,” said Cain. “This would not only be estate-tax exempt, but also exempt from an income tax perspective. Fund the trust with a low-interest-rate loan, and use it as an interest-rate arbitrage opportunity. The trust can then invest in an asset that earns 7% or 10% or 15% and only has to pay 1% back to the senior generation of the family.”
The concept is no different from using a securities portfolio to secure a loan from a bank or other entity, and then investing those lent dollars to earn a return higher than the interest rate on the loan—but using an intra-family loan to fund a trust leverages the assets down to junior generations in a family.
Cain said that Boston Private has been using intra-family lending to fund trusts for 30 years.
“The opportunity remains very attractive, but it was even more attractive last summer when the intra-family rate went below 50 basis points,” he said. “Prior to that the lowest it had ever been was at 85 basis points.
“This trifecta creates a unique and distinct opportunity: We have the high exemption, valuation discounts in some passive and active investments, and very low interest rates. With proper planning, families can shift their assets to the next generation in an ongoing, continuous wealth-creation event.”