How Low-interest Rates Create Estate Planning Opportunities

The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intrafamily lending has already occurred, these low rates provide a chance to amend the terms of current promissory notes to obtain these rates.

There are two opportunities presented:

1. The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
2. If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.

Here are a few situations where these loans are typically used:

• Parents extend a loan to an adult child, who is going through a challenging financial period.
• The parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.

Complex estate planning is where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.

With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication.

The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.

Speak with an experienced estate planning attorney about how your estate could benefit from the current low-interest rate environment.