Low interest rates present opportunities for your estate trusts


Last week we discussed some opportunities and incentives presented by The Coronavirus Aid, Relief and Economic Security Act (CARES) passed by Congress in late March 2020. This week we’ll focus on some opportunities presented by the historically low-interest rates that now exist.

When low rates are an advantage

Low-interest rates can be used for effective tax planning for higher net-worth individuals who need to remove assets from their taxable estates in a leveraged way and parents or grandparents looking to help their descendants in a tax-effective manner. The planning, however, can be complex and requires legal and tax advice.

Grantor retained annuity trusts

A Grantor Retained Annuity Trust (GRAT) works like the Charitable Remainder Trust we discussed last week, but the beneficiary is your child or another non-charitable person.

You create a trust — the GRAT — and transfer property to it. You receive the right to an annuity payment from the trust for a term of years. At the term’s end, what remains in the trust passes to your named beneficiary.

The gift of the remainder interest to your beneficiary is valued based on the present value of the estimated gift to the beneficiary, through a formula that includes a presumed interest rate known as the Section 7520 rate. The 7520 rate for the month of May is set at 0.80%.

In other words, you gift X$ into a GRAT and reserve the right to Y% annuity payments for 10 years, at which point the remaining trust assets are distributed to your beneficiary. The gift made is valued, for gift tax purposes, at $X less the Y% annual payments, assuming the trust funds grow at only 0.80%.

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The GRAT yields an estate and gift tax savings if you survive the term of the trust and the trust property generates a return in excess of the 7520 rate (currently 0.80%). In other words, you pass along more value than that which was subject to gift tax. Gifting lower-value property (marketable securities or real estate which has recently declined in value) now to a longer-term GRAT that could yield a return in excess of the low 7520 rate, could result in substantial assets passing to your beneficiaries free of the estate and gift taxes.

This strategy works best when the 7520 rate is low, as it is now, and the grantor is likely to survive the chosen term of the trust.

Charitable lead trusts

Where a Charitable Remainder Trust can help …read more

Source:: Dailynews – News


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