Falling Interest Rates Put Some Planning Techniques In Play

As you can see, when the 7520 rate is lower, as in the above example, the fathers taxable gift is much lower. All clients can appreciate such lower gift taxes. And for producers, this strategy demonstrates the knowledge and value they can bring to the planning process.

The private annuity also benefits from lower 7520 rates. In a private annuity transaction, a parent typically transfers property to a child in exchange for the childs promise to pay the parent a fixed, periodic income for life. When the fair market value of the property transferred equals the present value of the annuity, no gift tax is due.

If a private annuity is entered into during a period of lower interest rates, the fixed, periodic payment the child must make to the parent is lower. This is particularly important in cases in which individuals are avoiding making taxable gifts in the hopes (however faint) that estate and gift tax repeal will actually occur.

Suppose a parent, in exchange for a private annuity, transferred the $1 million family cattle ranch to her child in October 2001 with the 7520 rate at 5.6%. The annual payment to the parent would be $99,653. If the parent had made the transfer when the 7520 rate was 8.2%, the annual payment would have been $121,496. It takes a lot of beef to come up with that extra $21,843.

Lastly, Charitable Lead Annuity Trusts (CLATs) also can take advantage of lower interest rates. This technique involves a donor giving property to a charitable lead annuity trust for a term of years. During that term, the CLAT makes a fixed annuity payment to a charitable beneficiary, with the remainder passing to an individual or trust of the donors choosing. A decrease in interest rates increases the gift or estate tax deduction for the interest to charity, and decreases the gift tax value of the remainder.

With the Economic Growth and Tax Relief Reconciliation Act of 2001, it is commonly perceived that taxable gifts should not be made, due to the possibility that the gift and estate tax may actually be repealed. Until the dust settles on repeal versus reform, the cautious practitioner will rely on rolling two-year GRATs to transfer appreciation only out of the grantors estate.

Because CLATs and private annuities may also involve taxable gifts, they should be reviewed carefully to insure they fit the clients objectives.

, J.D., CLU, ChFC, is vice president-business planning for Jefferson Pilot Finiancial in Greensboro, N.C., Her email address is [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Copyright 2001 by The National Underwriter Company. All rights reserved. Contact Webmaster