Monday, November 23, 2009

1929 v. 2009

1929 Versus 2009.  In 1930, President Herbert Hoover believed that the recession had ended and that 1931 would bring a strong recovery.  It didn’t.  Of course, the Federal Reserve at that time was raising interest rates while the administration took a back seat approach to the problems.  Many, many banks failed and there were no bail outs.  We had bread and soup lines for years.  This time, we have historically low interest rates and the banks have been infused with cash from the government so they would not fail.  Perhaps we averted another Depression.  History will tell.

For now clients, estate planners, and financial advisors need to aware of the big opportunities presented to clients with such low interest rates.  We are doing Grantor Retained Interest Annuity Trusts (GRAT) that pass along wealth to the next generation at the lowest possible gift tax rates.  The low interest rate environment allows the parent to get an annuity at an historically low interest rate while the actual growth of the assets in the trust accrues to the children as remainderman at the end of the GRAT.  Low interest rates also lead to lower valuations of business interests.  These can be transferred at lower gift tax costs. When interest rates start their return to historical levels (let’s hope not to the 1970s level), it will be more costly to make these business interest gifts.