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Taking Advantage of Low Interest Rates

on Thursday, 2 March 2017 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

For just the second time in the past ten years, on December 14, 2016, the Federal Reserve increased its key interest rate by 0.25 percent, and it appears poised to do so several more times this year. Many are wondering if there are steps to be taken regarding their estate plans with respect to this and future increases in interest rates. Here are a few ways wealthy families can transfer money and take advantage of rates that are still historically low, while they last.

Intrafamily loans.  When a parent loans money to his or her child, the tax code sets forth the minimum interest rate that such family member must charge to avoid having it treated as a gift.  Right now, these minimum rates are low, meaning a parent could make a loan at a low rate, enabling his or her children to invest that money and thereby transferring investment gains to the next generation. Due to the low minimum rates, the children will likely come out ahead on their investment, reducing the amount of appreciation in the parent’s estate. As the interest rates rise, these minimum rates also will rise, and the ability for a child’s rate of return to exceed such interest rate may lessen.

Grantor retained annuity trusts.  A grantor retained annuity trust (“GRAT”) allows someone to transfer appreciating assets without affecting their gift tax exclusion.  The grantor receives annuity payments from the trust that, over time, add up to the original value plus required interest on the gift. The excess value of the assets pass to the heirs named in the GRAT and such excess value is not subject to gift or estate taxes.  Low interest rates make now a good time to set up a GRAT, as it will be more likely that the asset will exceed that rate of return and the grantor will be able to pass the excess appreciation to his or her heirs without incurring gift or estate taxes on that amount.

Charitable lead annuity trust.  A charitable lead annuity trust (“CLAT”) allows a donor to contribute assets to a trust that pays to a charity a fixed annual amount and leaves the remainder to the donor’s non-charitable beneficiaries. By executing a CLAT, the donor can remove assets from his or her estate and avoid tax on the appreciation of the assets. In a low-interest rate environment, to the extent appreciation of the assets exceeds the interest rate, the donor can pass assets to his or her heirs without incurring estate taxes on that appreciation.

Hannah K. Fischer


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