Investment Updates
Low Rates Give Estate Planning A Boost
Published Tuesday, January 6, 2009 at: 7:00 AM EST
Several techniques to cut gift- and estate-tax liability depend on interest rates published by the IRS, and those rates, like others, recently neared record lows. Despite fears of inflation rate that many believe will creep up and continued volatility in the stock market, hitching your estate plan to one or more of these vehicles or revisiting plans created when rates were higher could deliver major benefits.
Loan to family. Each month, the IRS publishes short-, mid-, and long-term Applicable Federal Rates (AFRs). When you make a loan, you need to charge interest at least as high as the AFR that applies to the loan term. (If you accept less, the loan may be considered a gift.) Suppose you lend your daughter a sum of cash for nine years at a mid-term AFR of 3%. If your daughter invests the borrowed money in a portfolio returning 7%, that four percentage point difference means she’ll come out ahead, earning more than she must repay. But that gain will be in her estate, not yours, and the loan reduces the size of your estate, cutting potential estate taxes. Of course, if her return is less than the 3% “hurdle rate,” this becomes a losing strategy.
Sale to an intentionally defective grantor trust. This accomplishes many of the same goals as a loan to family members and it benefits from low interest rates in the same way. In addition, because you, rather than the trust, pay income tax on earnings from the trust assets, your estate is further reduced, while the trust assets grow unencumbered by taxes. If you sold property to a defective trust some time ago and received a note, you may be able to refinance at a lower interest rate.
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