Low interest rates can benefit your estate planning strategies.
The world has been greatly impacted by COVID-19.
This is no secret.
It has affected jobs and taken lives.
According to a recent The National Law Review Journal article titled “Estate Planning in a Low Interest Rate Environment,” COVID-19 has impacted interested rates.
In fact, interest rates are lower than they have been for many years.
The Applicable Federal Rate (AFR) determines the least amount of interest allowed to be charged for below-market loans, oftentimes in the form of intra-family loans.
The May 2020 AFR is now at 0.25 percent for loans less than 36 months, 0.58 percent for loans between 36 months and nine years, and 1.15 percent for loans nine years or more.
If you have an intra-family loan, consider amending the terms to obtain current rates.
What does this mean?
The borrow does not need to repay as much money to the lender.
Are you a parents who lent money to a child who will also be your heir?
The lower interest rate can help with wealth transfer.
These parents will receive less money in return.
This means they can decrease your taxable estate.
How are loans typically used?
An adult child is struggling financially and needs some cash.
Parents lend money at a low interest rate and instruct the child to invest the money at a higher rate of return than the interest charged on the loan.
The money can then grow in the estate of the adult child rather than in the estate of the parents.
Another complex estate planning strategy is a sale to an intentionally defective trust.
The goal of the seller is to freeze the value of the estate.
The value of estate will be the amount the asset was sold for on an installment basis.
What does this do?
It provides an opportunity for growth to occurs separate from the taxable estate of the seller.
Although the lower interest rates benefit intra-family loans, these are sophisticated estate planning strategies.
Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Trusts (CTLs) also benefit from low interest rates.
Discuss your options with an experienced estate planning attorney to see if you could benefit from low interest rate strategies.
Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”