Good News for Estate Planning

Declining interest rates may not be good for potential buyers of bank Certificates of Deposit, but they are good news for various estate planning strategies.

Estate planning for Massachusetts elder couples.I will address a few areas and techniques where low interest rates can have a very positive impact on the estate planning process:

  1. Qualified Personal Residence Trust (QPRT) – A QPRT is an irrevocable trust to which the donor transfers their personal residence and retains the right to reside in the residence for a specific term of years, 10 years is common.  After the term of years, the residence passes to the children or other beneficiaries.  In periods of low interest rates, the value of the retained interest is high, and the amount of the gift remains low.
  2. Grantor Retained Annuity Trust (GRAT) – A grantor transfers property to an irrevocable trust and retains an annuity interest for a specific term.  At the expiration of the term interest, the property typically passes to a child.  Gift tax is payable on the present value of the remainder interest.  As interest rates drop, the value of the retained interest increases—thereby decreasing the value of the gift of the remainder interest.  A drop in interest rates is good for GRAT planning.
  3. Private Annuities – In a typical private annuity transaction, a parent transfers property to a child in return for that child’s unsecured promise to pay the parent a fixed income for life.  If the fair market value of the property equals the present value of the annuity under I.R.C. Section 7520 tables (currently at 2.8%), there is no gift tax on the transfer.  A further decrease in the interest rate lowers the annual payment amount that the child has to make to the parent.  Furthermore, if the parent dies during the annuity payments, all payments cease and the child has met their obligations and owns the property outright.

Low interest rates, including the IRS’ Section 7520 rate, can have a significant impact on an individual’s estate planning outcome.  The effectiveness of many estate planning techniques vary with interest rate changes.

If you have any questions about any of these areas and techniques of the estate planning process, feel free to contact me or your estate planning attorney.

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