Estate Tax Planning Tools for a Low Interest Rate Environment

While interest rates continue to stay low, now is the time to look to these techniques for an effective estate tax planning strategy. We can help. Contact our Estate Planning team at 316-631-3131 to get started.

Irrevocable Grantor Trusts (“IGTs”) – Sale to irrevocable grantor trust leverages the use of a small portion of exemption to transfer discounted closely-held business interests that are expected to appreciate.

     “If you do a wealth transfer strategy tied to interest rates, you have a very low hurdle for the technique to work. Estate planning works best when you give something that is going to appreciate significantly down the road.”      – American Institute of Certified Public Accountants (AICPA)

Grantor Retained Annuity Trusts (“GRATs”) – Donor transfers assets that are expected to exceed the appreciation assumed by the IRS to a trust in exchange for a guaranteed annuity.  Any growth that exceeds the assumed rate passes free of gift and estate tax.  The IRS’ assumed rates averaged less than 1% for 2020, while the average S&P 500 return for 2020 was 8.94%.  Note – this technique may be a target in new tax legislation so the window for using this technique may be closing.

Charitable Lead Annuity Trusts (“CLATs”) – Donor transfers assets to a trust that in turn makes regular distributions to qualified charities.  At the end of the charitable term, assets will be distributed to the donor’s chosen beneficiaries.  Assets that appreciate above the IRS’s assumed interest rate will pass to the remainder beneficiaries.  It is possible to set the charitable income stream at a rate to create a transfer to the non-charitable beneficiaries free of gift and estate tax.

Techniques Not to Use – Qualified Personal Residence Trusts (“QPRT”) Higher Section 7520 rate leads to a higher value of grantor’s right to use residence, which leads to a lower future remainder interest, which leads to taxable gift decreases.  In the end, the technique does not leverage the gift tax exemption used to transfer the value of the residence.  Additionally, at the end of the term, the owners will have to lease the home back from their children.

If you have questions about this Alert, to discuss any of these techniques in detail, or how these recommendations apply to a particular circumstance, please call Dan Peare, Hugh Gill, or Ryan Farley at 316.631.3131.