Estate planning for low and high rates

Wealth Solutions

Estate planning for low and high rates

Learn more about different estate planning vehicles and how they can help your client take advantage of low and high interest rate environments.

A changing interest rate environment might affect your client’s estate plans – but it can also provide an opportunity to lower gift and estate taxes by using certain wealth-transfer options. Learn more about these different vehicles and how they interact with high and low interest rate environments.

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.

Interest Rate Interaction: The heirs benefit from a lower gift tax when the market return exceeds the hurdle rate. If you think interest rates are going to continue to rise, a GRAT could be used to lock in today’s lower rate.

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.

Interest Rate Interaction: The potentially taxable part of the gift is the present value of the asset in a certain number of years. A high interest rate environment means a lower present value, a lower gift value, and lower gift and estate taxes.

Charitable Remainder Annuity Trusts (CRATs)

In a CRAT, 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.

Interest Rate Interaction: 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 – meaning a higher tax deduction for the grantor.

These vehicles are just a few options to consider when evaluating your client’s estate plan in light of changing interest rates. You can help your client consider whether these strategies might be a good fit for their financial plan. 

Please be aware that there may be substantial fees, charges and costs associated with establishing a charitable remainder trust.



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