Estate Planning in a Rising Interest Rate Environment: Part II

High(er) Interest Rate Strategies Notwithstanding the current modest uptick in interest rates, estate planners shouldn't abandon the strategies that work best when interest rates are low, such as intra-family loans, sales to grantor trusts, grantor retained annuity trusts (GRATs) and charitable...

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Bibliographic Details
Published in:Trusts & Estates 2018-07, p.15
Main Authors: Kerry O'Rourke Perri, Foley, Dana M, Alistair, Sandy, Christopher
Format: Article
Language:English
Subjects:
Advisors
Beneficiaries
Capital gains
Charities
Estate planning
Estate taxes
Gift taxes
Gifts
Grantor retained annuity trusts
Grantor retained income trusts
Grantor trusts
Growth stocks
Income taxes
Interest rates
Internal Revenue Code
Present value
Property taxes
Qualified personal residence trusts
Tax deductions
Tax exempt organizations
Tax exemptions
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Summary:High(er) Interest Rate Strategies Notwithstanding the current modest uptick in interest rates, estate planners shouldn't abandon the strategies that work best when interest rates are low, such as intra-family loans, sales to grantor trusts, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs), all of which were discussed in Part I of this article. 1 But, as interest rates (and, in turn, the discount rate applicable under Internal Revenue Code Section 7520 (7520 rate)) continue to rise, the following strategies will become increasingly attractive:[...]if all other factors are equal, a QPRT will be more effective at a higher 7520 rate (when the value of the grantor's income interest is higher) than at a lower 7520 rate (when the value of the grantor's income interest is lower).If the grantor dies during the QPRT term, the QPRT will fail, and the entire value of the residence will be included in the grantor's estate.[...]in addition to the right to occupy the residence, the grantor of a QPRT retains a reversion in the event of the grantor's death during the QPRT term.(The annuity payments are taxable to the recipient, however, and are deemed to carry out ordinary income, capital gains, tax-free income and return of principal according to a tiered system.) A CRAT can thus give the grantor or other individuals access to increased cash flow in the form of defined annuity payments until the annuity period ends and the remaining assets pass to charity.
ISSN:0041-3682