The federal government
requires the use of certain interest rates to
value various items used in
estate planning, such as an income, annuity, or remainder interest in a trust.
The government also has interest rates that a taxpayer may be deemed to use in
connection with certain installment sales or intra-family loans. These rates
are currently at or near historic lows, presenting several estate planning
opportunities.
Low interest rates favor
certain estate planning strategies over others. For example, low interest rates
are beneficial for a grantor retained annuity trust (GRAT), a charitable lead
annuity trust (CLAT), an installment sale, and a low-interest loan. On the
other hand, low interest rates have a detrimental effect on a qualified
personal residence trust (QPRT) or a charitable gift annuity. But interest
rates have little or no effect on a charitable remainder unitrust (CRUT).
Grantor retained
annuity trust (GRAT)
In a GRAT, you transfer property to a trust,
but retain a right to annuity payments for a term of years. After the trust
term ends, the remaining trust property passes to your beneficiaries, (such as
family members). The value of the gift of a remainder interest is discounted
for gift tax purposes to reflect that it will be received in the future. Also,
if you survive the trust term, the trust property is not included in your gross
estate for estate tax purposes. If the rate of appreciation is greater than the
IRS interest rate, more of the value of trust assets escapes gift and estate
taxation. Consequently, the lower the IRS interest rate, the more effective
this technique.
Charitable lead
annuity trust (CLAT)
In a CLAT, you transfer property to a trust,
giving a charity the right to annuity payments for a term of years. After the
trust term ends, the remaining trust property passes to your beneficiaries,
such as family members. This trust is similar to a GRAT, except that you get a
gift tax charitable deduction. Also, if structured so that you are taxed on
trust income, you receive an up-front income tax charitable deduction for the
gift of the annuity interest. The lower the IRS interest rate, the more
effective this technique is.
Installment sale
You may also wish to consider an installment
sale to family members. With an installment sale, you can generally defer the
taxation of any gain on the property sold until the installment payments are
received.
However, if the family member resells the
property within two years of your installment sale, any deferred gain will
generally be accelerated. The two-year limit does not apply to stocks that are
sold on an established securities market.
You are generally required to charge an
adequate interest rate in return for the opportunity to pay in installments, or
interest will be deemed to be charged for income tax and gift tax purposes.
However, with the current low interest rates,
your family members can pay for the property in installments, while paying only
a minimal interest cost for the benefit of doing so.
Low-interest loan
A low-interest loan to family members might
also be useful. 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.
Effect of low rates on
other strategies
·
Charitable remainder unitrust: You retain a
stream of payments for a number of years (or for life), after which the
remainder passes to charity. You receive a current charitable deduction for the
gift of the remainder interest. Interest rates have no effect if payments are
made annually at the beginning of each year, and low interest rates have only a
minimal detrimental effect if payments are made in any other way.
·
Qualified personal residence trust: You transfer
your personal residence to a trust, retaining the right to live in the home for
a period of years, after which the residence passes to your beneficiaries, (such
as family members). The value of the gift of a remainder interest is discounted
for gift tax purposes to reflect that it will be received in the future. The
lower the IRS interest rate, the less effective this technique is.
·
Charitable gift annuity: You transfer
property to a charity in return for the charity's promise to make annuity
payments for your life (or for you and your spouse's lives). You receive a
current charitable deduction for the gift of the remainder interest. The lower
the interest rate, the lower the amount of your charitable deduction will be.
Also, charities have generally been forced to reduce payout rates offered
because of the economic downturn and the low-interest-rate environment.
