As many of our clients experienced in 2019, interest rate trends can lead to meaningful estate planning strategies. Many economists are forecasting interest rates to remain low in the upcoming year, presenting valuable opportunities to transfer additional wealth to next generations while minimizing taxes. Below are some effective estate planning strategies and wealth transfer instruments you may wish to discuss with us in early 2020:
A grantor retained annuity trust (GRAT) allows for tax-free transfers of assets from a wealthy family’s estate to its beneficiaries. Below is a brief explanation on how a GRAT works:
In short, the lower the interest rate, the more enticing a GRAT becomes. The 7520 IRS rate has recently fallen significantly; as of January 2020, the rate is 2%.
The current low interest rate environment is also an ideal time for a parent to loan money to younger family members. If the loan recipient can invest the borrowed funds and generate a return greater than the minimum interest rate, the wealth will have been successfully transferred without any gift tax consequences.
Example: If a loan of $1 million were made to a child for 10 years at 2.0% and the child invests the proceeds in an investment earning 7% after taxes, the excess after 10 years is $690,000; that amount will have been transferred to the child gift tax-free.
Families with existing loans may want to consider refinancing those loans while in a low interest rate environment. The current AFR (Applicable Federal Rate), which is the minimum rate that an intra-family loan can charge, is 1.69% for a mid-term loan. In comparison, the AFR rate for a mid-term loan in December 2018 was 3.07%. A loan refinance could re-lock the loan at a lower rate thus saving interest and increasing the wealth passed on to future generations.
Feel free to contact our Wealth Strategies group if you have questions on this estate planning topics or would like help connecting to an estate attorney.
Robert Katz, CFP® – Partner, Director of Wealth Strategies – 617.986.5145
Michael Syer, CFP® – Wealth Strategies Advisor – 617.986.5157
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