Volatility and Mortality Risk Considerations in Estate Planning

Abstract

Observing that financial and estate planning is generally based on geometric compounding, the author points to the problems associated with an approach, which may simplify planning, but seldom occurs in the real world. Arguing that return variation may have negligible impact on certain strategies, he suggests that they can have dramatic impact on situations in which assets are transferred between persons or entities. Since the latter situation is the core of transfer tax minimizing strategies, the article undertakes a simplified discussion to illustrate how return volatility must be a part of the planning and execution of gifting strategies. After a brief background review of gifting as a basic transfer tax strategy, the author then illustrates the importance of investment volatility in projecting the actual benefit of transfer planning, using a Grantor Retained Annuity Trust as an example of a complex transfer tax technique.