Inflation can have a big impact on how you structure your estate plan, and so it should be an important consideration when drafting your plan. Recently, interest rates—particularly those instituted by Section 7520—have become more important than ever. After a fifteen-year run of low rates (interest rates stood at just 1.6% in early 2022), the 7520 rate jumped to 5.2% in December of 2022. This move by the Federal Reserve was designed to help curb inflation. Rates have since fallen slightly, but are still higher than average at 4.6%.
These high interest rates don’t equal disaster for your estate plan. For one, higher inflation also means higher exemptions for you. According to Bloomberg Tax, with the higher interest rates, the federal transfer tax exemption limit rose to $12.92 million, an $860,000 increase. The annual gift tax exclusion amount also rose to $17,000. However, there are several active, important, and advantageous ways you can make the higher rates work for you and your money. As rates rise, it’s also important to lock in lower rates while you can, which will benefit you now and in the future.
Strategies for Leveraging High Interest Rates:
- Reconsider QPRTs: While low interest rates dominated the market, qualified personal residence trusts (QPRTs) were put on the back burner. However, with today’s increased rates, the QPRT’s value as a wealth transfer technique has been renewed. A trust that allows you to transfer a personal residence to beneficiaries while still occupying the property not only minimizes estate taxes, it also reduces the gift amount reportable for gift taxes in a high interest rate environment.
- Benefit from a CRT: A Charitable Remainder Trust (CRT) is a great way to retain financial stability for yourself while also planning which institutions, non-profits, or charities will benefit from your estate. With a CRT, you contribute property to a return and retain and income interest for a term of years or lifetime. Upon death, the assets that remain in the trust go to the charity. This option is beneficial in the face of higher interest rates because the value of the remainder is calculated using the 7520 rate when you create the trust. A higher the 7520 rate allows for a greater charitable income tax deduction.
- Leverage the Flexibility of a GRAT: True, Grantor Retained Annuity Trusts (GRATs) are a valuable tool when rates are low, but according to Bloomberg Tax, a GRAT can work for your estate plan when rates are higher, too. A GRAT provides additional opportunity to favorably leverage both the gift and estate taxes. If you survive the GRAT term, the trust assets are excluded from your estate upon death, minimizing estate taxes. Further, if an asset placed in the GRAT has growth potential beyond the 7520 rate the beneficiaries of the GRAT receive appreciation of the trust’s assets free of gift tax. Should the growth rate be less than the 7520 rate, the only harm is the loss of the transactions costs as there are no adverse tax consequences.
Careful consideration of these points and your own unique estate planning needs will empower you to make financial choices that serve you, your loved ones, and your favorite charities now and in the future.
Is it Time to Update Your Plan with Interest Rates in Mind?
Working with a qualified attorney is the best way to ensure your estate plan is optimized for the current financial landscape. Caress Law, PC can help you determine if it’s time to update your existing plan, and can certainly help you draft a new plan to protect you, your family, and your loved ones. Give us a call today at (503) 292-8890 or fill out the contact form below.