Many financial experts are predicting a likely increase in interest rates, creating concerns among those with estate plans and the impact the shift will have on them. Rates have enjoyed record lows from 2010 to likely the end of 2021.
However, change may be on the way that may see an upswing, requiring strategies tailored for higher interest rate environments that include the following:
Qualified Personal Residence Trust (QPRT)
This type of trust transfers a personal residence to beneficiaries while allowing you to continue living in the home. Once the initial term is over, the trust or its beneficiaries effectively become landlords, renting the property to you at a fair market value. The first transfer represents a taxable gift with the value coming from the remaining interest. As the rate increases, taxable gifts decrease, making it an ideal strategy when it comes to a potential change in the coming year.
Charitable Remainder Annuity Trust (CRT)
The grantor (you) receives an annuity from the CRT for a set number of years, with a selected charity receiving what remains at the end. The value is calculated and provides you with a charitable deduction on your income taxes. Certain qualifications apply to get past IRS scrutiny, specifically the remainder reaching a minimum threshold. The more value, the more likely it will pass a review.
Perhaps the simplest estate planning method in low-interest environments is a loan among family members. Lending cash to a future beneficiary takes the form of an interest-only loan where a balloon payment is required when the final payment is due. Assets purchased by the “borrower” with the proceeds will appreciate more than the loan’s paid interest rate. That excess goes to the borrower sans any gift taxes.
Estate planning is a complex process where interest rates play a role in value. The goal is to maximize what you leave behind for loved ones, regardless of the economic environment.