Wealth managers consider many factors when designing and implementing wealth transfer strategies for their high-net worth clients. The appreciation potential of the client’s personally owned assets, the liquidity needs of the estate, the charitable intent of the client, and the needs of estate beneficiaries are commonly mentioned as primary factors when preparing estate plans. There are instances, however, when other variables may drive decision making.
The applicable federal rate (AFR), published monthly by the IRS and monitored closely by estate planners, recently fell 0.4%, to reach 2.8% in early July. The AFR is integral to the technical design of several popular wealth transfer techniques, including grantor-retained annuity trusts (GRAT), charitable remainder and charitable lead trusts (CRT, CLT), qualified personal residence trusts (QPRT), and various installment arrangements. Over the past 20 years, it has fluctuated between a historical low of 2% February 2009 and a historical high of 11.6% in May 1989. So what does its recent movement toward the historical low mean for you?
Strategies to consider when interest rates fall
As mentioned previously, the AFR is a key factor in the design of several estate planning strategies. Which among those strategies is enhanced when the AFR falls?
Estate planning techniques that involve some form of an installment sale between family members and intra-family loans are apt to benefit from a reduction in interest rates because the minimum rates of interest charged to avoid gift tax issues also fall. Clients who plan to enter into installment sales or intra-family loans may find it beneficial to take advantage of these rates now. Additionally, clients with existing installment sales or intra-family loan arrangements might consider refinancing their arrangements to take advantage of today’s lower rates.
Clients with charitable intent may be interested in exploring the use of a charitable lead annuity trust (CLAT) to help fulfill their charitable goals while enhancing their wealth transfer planning. A CLAT is a split-interest trust, meaning the trust has two beneficiaries, a primary and a remainder. The primary or lead beneficiary is designated to receive an income stream for the term of the trust; a qualified charity serves as lead beneficiary. The remainder beneficiary receives all remaining assets in the trust after the lead beneficiary’s interest expires at the end of the trust term. For wealth transfer purposes, the client’s children are a common choice for a remainder beneficiary.