Article: Estate Planning in a Period of Low Interest Rates


	Jeff Bither

June 2008

Estate Planning in a Period of Low Interest Rates

Especially attractive now are low, locked-in interest rates on sales to family members and creation of a grantor retained annuity trust

Estate planning essentially boils down to transferring assets to your heirs, whether accomplished during your lifetime or through your estate. If selling assets or making transfers by gift makes sense in your situation, now might be the time to give those lifetime transfers special attention.

For example, in a slumping real estate market, you might be able to transfer currently appraised rental properties or a vacation home at a bargain compared to the inflated values that were common a few years ago. A current appraisal is generally necessary to reflect the latest market values.

In many cases, an even more significant discounting can be accomplished by making timely use of the current low interest rates. Each month, the IRS publishes a minimum set of interest rates that can be used in family sale transactions (go to www.irs.gov and search for “Index of Applicable Federal Rates”). In a sale to a family member, you can lock in today’s low rates on a long-term note.

Example. Bob, age 65, had a rental property that he wanted to sell to his son, Jerry. In May 2008, Bob sold it to Jerry for $1 million on a 30-year note, locking in the May 2008 long-term IRS minimum interest rate for annual payments at a rate of 4.21%. Had Bob sold this property a year earlier, the IRS minimum interest rate would have required a payment of $5,000 per month greater than was required in May. Over the 30-year term of the note, Jerry will pay about $150,000 less interest. Even if interest rates rise in the future, this installment contract would be protected from any IRS adjustment.

The current low interest rates also favor more sophisticated asset transfer techniques, such as the use of a grantor retained annuity trust. By use of a GRAT, you can make large financial gifts to family members without incurring gift tax and without creating a locked-in gain or a long-term installment sale.

A donor sets up a GRAT by donating to the trust an asset that the donor expects to appreciate, such as S corporation stock in a family business. The trust is set up as an annuity that pays the donor an annual payment for a fixed period of time, i.e., the term of the annuity. At the end of the term, any remaining value in the trust is passed on to a beneficiary of the trust as a gift. The beneficiary must be a family member of the donor. If the donor dies before the end of the term, then the value of the trust at that time is passed on to the beneficiary.

If a GRAT is funded with highly volatile assets, it is possible that the actual interest earned on the assets will be substantially higher than the IRS theoretical interest. Thus, at the end of the term the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.

The May 2008 IRS interest rate for structuring this annuity was only 3.2%, a sharp decrease from the 5.6% of a year earlier. Again, the current low interest rates have the effect of allowing a greater asset value to pass to your heirs.

If you would like to learn more about designing a sale or annuity transaction that helps you meet your objectives in transferring assets to your children or other heirs, please contact your Schmidt Westergard & Company tax professional.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.