The Federal Reserve has increased rates significantly in recent years, and with another recent spike in market rates, the landscape of estate planning strategies has shifted. Different tax strategies now offer varying payoffs as a result of these interest rate changes. Low-interest family loans, once a popular tool for tax and estate planning, are now less attractive due to the higher interest rates required to avoid negative tax consequences.
Grantor retained annuity trusts (GRATs) have also become less appealing with higher interest rates. These trusts are most beneficial when funded with assets expected to appreciate rapidly, but the need to pay more to the grantor due to interest rate hikes means lower potential benefits. Conversely, charitable remainder trusts and charitable gift annuities have become more attractive, as higher interest rates increase the present value of the charitable gift tax deduction and potential lifetime income to the donor.
Another strategy benefiting from rising interest rates is the qualified personal residence trust (QPRT). By transferring a first or second home into a trust, taxpayers can lower the value of the taxable gift associated with the home’s future transfer to beneficiaries. QPRTs were not commonly used when interest rates were lower, but they now present a viable option for transferring vacation homes to children at a lower gift tax cost.
All of these strategies fall under the umbrella of split interest gifts, wherein the taxpayer retains ownership or benefits from the property before it is ultimately transferred to beneficiaries or charity. The values of these interests are determined using current interest rates provided by the IRS known as the 7520 rates, or applicable federal rates. Estate planners can use software to analyze the tax benefits of these strategies in individual situations, and free calculators are available online to help taxpayers assess their options.
It is important for individuals to review their estate planning strategies in light of these recent interest rate changes. Some strategies that were attractive in the past may no longer offer the same benefits, while others may now present more appealing options. By understanding how interest rate movements impact estate planning tools, individuals can make more informed decisions to maximize their tax savings and legacy planning goals.
Overall, interest rate changes have significant implications for estate planning strategies, influencing the effectiveness of various tax planning tools. As rates continue to fluctuate, it is essential for individuals to stay informed and reassess their plans to ensure they are utilizing the most advantageous strategies for their financial and legacy goals. By working with a knowledgeable estate planner and staying informed about current rates and tax laws, individuals can navigate these changes and make informed decisions to protect and preserve their wealth for future generations.
