Estate Tax Planning Designed to Take Advantage of Low Interest Rates

Attorney Christine S. Anderson

April 2015

Several years ago, when interest rates were at what seemed like all-time lows, we assisted clients with a couple of estate tax planning vehicles designed to leverage lifetime gifting opportunities, grantor retained annuity trust and qualified personal residence trusts. Currently, rates are still surprisingly low, leading us to recommend again that our clients consider taking advantage of these same techniques that have proven to be highly beneficial to many of our clients.

A grantor retained annuity trust (GRAT) is an irrevocable trust into which the grantor transfers investment assets while retaining the right to receive an annuity interest for a term of years. At the end of the term, the remaining assets pass to beneficiaries. The value of the gift, for estate and gift tax purposes, is the current actuarial value of the beneficiaries' right to receive the assets remaining in the GRAT at the end of the term, determined in the year the GRAT is created. The value of the gift of the remainder interest is calculated using an interest rate set by the IRS. If the value of the gifted assets increases at a greater rate than the IRS interest rate used to calculate the remainder value, the increase in value is transferred to the beneficiaries estate and gift tax free. For example, if you transfer investments worth $500,000 into a GRAT and retain the right to receive a $105,000 annuity each year for 5 years, using May's IRS interest rate of 1.8%, the current value of the remainder interest would be $2,205.50. This would be the amount of the taxable gift. If the actual growth rate of the GRAT investments is greater than 1.8%, then the excess in the GRAT at the end of the term would be a tax-free transfer of wealth to the beneficiaries. For example, assuming a 7% growth rate $95,148 would pass estate and gift tax free to the beneficiaries of the GRAT. If the actual growth rate is the same as the IRS rate, then there would be no tax-free transfer of wealth. If the actual growth rate is lower than the IRS rate, then you would have been better off not proceeding with a GRAT from a gift tax standpoint.

A similar technique is a qualified personal residence trust (QPRT) which can be used for a primary residence or vacation home with the donor retaining the right to live in the home for a term of years and with the property passing to the beneficiaries at the end of the term. If the value of the home increases more than the IRS rate, then the corresponding increase in value at the end of the term is a tax-free transfer of wealth to the beneficiaries.

If you are interested in learning more about estate planning using a GRAT or a QPRT, call the office and schedule an appointment to meet with Alyssa or me. We would be happy to work with you. Or, if you have previously set up one or more GRATs, and you have seen first-hand how the tax-free transfer of wealth is achieved, let us help you to create additional GRATs while interest rates remain low.

Several years ago, when interest rates were at what seemed like all-time lows, we assisted clients with a couple of estate tax planning vehicles designed to leverage lifetime gifting opportunities, grantor retained annuity trust and qualified personal residence trusts. Currently, rates are still surprisingly low, leading us to recommend again that our clients consider taking advantage of these same techniques that have proven to be highly beneficial to many of our clients.

A grantor retained annuity trust (GRAT) is an irrevocable trust into which the grantor transfers investment assets while retaining the right to receive an annuity interest for a term of years. At the end of the term, the remaining assets pass to beneficiaries. The value of the gift, for estate and gift tax purposes, is the current actuarial value of the beneficiaries' right to receive the assets remaining in the GRAT at the end of the term, determined in the year the GRAT is created. The value of the gift of the remainder interest is calculated using an interest rate set by the IRS. If the value of the gifted assets increases at a greater rate than the IRS interest rate used to calculate the remainder value, the increase in value is transferred to the beneficiaries estate and gift tax free. For example, if you transfer investments worth $500,000 into a GRAT and retain the right to receive a $105,000 annuity each year for 5 years, using May's IRS interest rate of 1.8%, the current value of the remainder interest would be $2,205.50. This would be the amount of the taxable gift. If the actual growth rate of the GRAT investments is greater than 1.8%, then the excess in the GRAT at the end of the term would be a tax-free transfer of wealth to the beneficiaries. For example, assuming a 7% growth rate $95,148 would pass estate and gift tax free to the beneficiaries of the GRAT. If the actual growth rate is the same as the IRS rate, then there would be no tax-free transfer of wealth. If the actual growth rate is lower than the IRS rate, then you would have been better off not proceeding with a GRAT from a gift tax standpoint.

A similar technique is a qualified personal residence trust (QPRT) which can be used for a primary residence or vacation home with the donor retaining the right to live in the home for a term of years and with the property passing to the beneficiaries at the end of the term. If the value of the home increases more than the IRS rate, then the corresponding increase in value at the end of the term is a tax-free transfer of wealth to the beneficiaries.

If you are interested in learning more about estate planning using a GRAT or a QPRT, call the office and schedule an appointment to meet with Alyssa or me. We would be happy to work with you. Or, if you have previously set up one or more GRATs, and you have seen first-hand how the tax-free transfer of wealth is achieved, let us help you to create additional GRATs while interest rates remain low.