Want Tools With Low Interest Rates?
WHAT ESTATE PLANNING TOOLS ARE BEST WITH LOW INTEREST RATES?The I.R.S. establishes the interest rates we use for calculating the tax effect of many estate planning tools. Dropping interest rates make some tools more attractive and some tools less attractive.
Internal Revenue Code Section 7520 rate is the rate or the basis of the rate used for many of the estate planning tools we use. The Section 7520 rate is the annual mid-Term AFR - multiplied by 120 % - and then rounded to the nearest 2/10ths of 1 percent. These rates are published in monthly revenue rulings. For example, the April rates were published published in Rev. Rul. 2001-17. Those rates are:
Annual Short Term Rate: 4.63 percent. Annual Mid-Term Rate: 4.94 percent. Annual Long-Term Rate: 5.43 percent. The Section 7520 rate is 6%.
THE FOLLOWING ARE MADE MORE ATTRACTIVE BY LOWER INTEREST RATES.
PRIVATE ANNUITIES:A private annuity involves the transfer of assets by person who is going to receive the annuity to the person who is going to pay the annuity. The transaction removes those assets fro the annuitant's estate. Private annuities often look like good tools until the numbers are run. Often, the amount which one anticipates has to be repaid to the annuitant is not practical. Private Annuities work better when 7520 rates are lower because lower annuity payments are required from the purchaser.
GRANTOR RETAINED ANNUITY TRUST:
In a GRAT, the person setting up the trust names another person(s) as the beneficiary of the trust, but reserves income for a period of time. The Lower 7520 rates mean lower taxable gifts to those who benefit after the expiration of the income interest r4eser4ved by the person who set up 5te trust. A GRAT becomes more attractive with lower interest rates.
CHARITABLE LEAD ANNUITY TRUST:
In a CLAT, a trust is established and charity receive a set sum for a period of time and beneficiaries, often family members, receive the assets remaining in the trust at the end of the period of time. Lower 7520 rates mean an increase in the present value of the charity's lead interest. That means a larger income tax deduction can be taken for the gift and the gift to those who benefit after the end of the charitable interest is lowering value so potentially larger amounts can be transferred.
CHARITABLE GIFT OF REMAINDER INTEREST IN FARM OR RESIDENCE:
The drop in the 7520 rates increases the client's estate, gift, or income tax deduction.
THE FOLLOWING ARE NOT AFFECTED MUCH BY INTEREST RATE CHANGES
UNITRUSTS:Unitrusts payout a sum annually, usually to the person who set it up, based upon a percentage multiplied by the value of the trust determined annually (usually January 1) Almost all unitrusts are not much affected. . When the annual payment is to the person who set up the trust, the Unitrusts is essentially insensitive to changes in interest rates because it is almost totally driven by the payout rate (the percentage). So even a large upward or downward swing in the 7520 rate will make little, if any, perceptible change in the size of the gift tax deduction.
This is true for Grantor Retained Unitrusts, Charitable Remainder Unitrusts.
A Charitable Lead Unitrust is one in which the annual payment first go to charity and then after a period of time, the assets usually are distributed to individual beneficiaries. A CLUT is essentially insensitive to changes in interest rates because it is almost totally driven by the payout rate (the percentage).
LOWER INTERESTS RATES MAKE THE FOLLOWING LESS ATTRACTIVE
The following tools are less desirable when interest rates are low: GRATs, GRITs, PRTs, and QPRTs. When interests rates are low, the value of the gifts are higher at the end of the period of time of the right to receive income. Gifts made using these tools at this time should be carefully considered as other tools may be better tools.Return to the list of news stories.