Utilizing Low-Interest Rates in Estate Planning
“A more present sense of one's own mortality may drive those who have not made plans before to begin the process of creating an estate plan. For those who have existing plans, are they up to date? How does the changing economic environment affect prior decisions?”
One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intrafamily lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.
Impact of Decreased Applicable Federal Rates
Opportunities for Amending Promissory Notes
There are two opportunities presented:
- The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
- 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.
Common Applications of Intrafamily Loans
Assisting Adult Children in Financial Difficulty
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.
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Exploring Additional Estate Planning Strategies
Grantor Retained Annuity Trusts (GRATs)
Charitable Lead Trusts (CLTs)
Consult an Estate Planning Attorney
Tailoring Strategies for the Low-Interest Rate Environment
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Estate Planning Legacy Planner
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