Trust strategies for high rates & low rates

Wealth Solutions

Trust strategies for high rates & low rates

Changing interest rate environments might affect your clients’ estate plans. Keep these in mind…

Changing interest rate environments might affect your clients’ estate plans. They may want to take advantage of wealth-transfer options before rates climb even further – or keep in mind other strategies for when rates are low. 

Strategies that work best for low rates:

Grantor retained annuity trusts (GRATs)

GRATs are often used to pass down appreciating assets to beneficiaries without taking a gift tax hit and to lower the overall estate tax burden. The grantor (person setting up the trust) usually receives annuity payments from the trust that add up to the asset’s original value plus a market-based interest rate set by tax rules. If the assets generate a total pretax return that exceeds the “hurdle” rate, the excess return passes to heirs free of gift and estate taxes. If you think interest rates are going to continue to rise, you could set up a GRAT to lock in today’s lower rate.

Strategies that work better in high rate environments:

Qualified personal residence trusts (QPRTs)

QPRTs are often used to pass a primary residence or vacation home to beneficiaries, while the grantor retains the right to live in the house for a number of years. It essentially freezes the value of the property for gift and estate tax purposes. The potentially taxable part of the gift is the present value of the asset in a certain number of years – in a higher rate environment, the present value of the asset is lower, so the gift value is lower.

Charitable remainder annuity trusts (CRATs)

Grantors name one or more charities as the ultimate beneficiary while they continue to draw income from the trust during their lifetime. When the CRAT is funded, the grantor gets a tax deduction for the remainder interest that will ultimately go to the charity. In a higher rate environment, the present value of the income stream the grantor receives is lower, making the value of the ultimate gift to the charity higher for tax purposes. 



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