With the Fed’s recent interest rate cut and more interest rate reductions likely on the way, this may be a good time to take advantage of the low interest rate environment to transfer assets to your beneficiaries with minimal tax consequences and significant benefits to your beneficiaries.
One strategy is to create a trust called a grantor retained annuity trust (“GRAT”) and transfer highly appreciated assets to the GRAT. The terms of the GRAT would state that you would receive a stream of income payments (the annuity) for yourself over a certain term of years. When the term designated for the annuity expires, the beneficiaries you’ve designated would receive whatever assets are left in the GRAT.
When the GRAT investments outperform the IRS mandated minimal interest rate for the annuity (currently, 2.2%), the excess passes to your beneficiaries free from any federal gift tax. This is easier to accomplish when the interest rate is low, making a GRAT a more effective estate planning strategy in a low interest rate environment.
If you are charitably inclined, now may be a good time to create a Charitable Lead Annuity Trust. A Charitable Lead Annuity Trust, or “CLAT,” is similar to a GRAT except that, instead of you receiving the initial stream of annuity payments, you designate a charity to receive them. When the Trust ends, the remainder goes to the beneficiaries named in the Trust.
As with a GRAT, if the CLAT’s investments out-earn the IRS mandated interest rate, the excess passes to your beneficiaries are free from any federal transfer taxes. This is another instance in which very low interest rates can mean the opportunity to pass on large amounts to your loved ones while minimizing your tax bill.
A third strategy that might be useful is a low-interest loan to family members. You are generally required to charge an adequate interest rate on the loan for the use of the money, or interest will be deemed to be charged for income tax and gift tax purposes. However, with the current low interest rates, you can provide loans at a very low rate and family members can effectively keep any earnings in excess of the interest they are required to pay you. If you would like to discuss your estate and trust planning options, please contact PLDO Senior Counsel Jason S. Palmisano in our Florida office at 561-362-2030 or email [email protected].
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