Part 1 in a 2-Part Series
Strike While Interest Rates Are Low: Low Interest Planning Strategies for Passing on Your Wealth
A Grantor Retained Annuity Trust (GRAT)
COVID-19 has deeply impacted the U.S. economy. What’s more, the effects will likely continue for some time. Most agree the pandemic is not a positive development. Nevertheless, some silver linings emerge. For instance, take advantage of powerful estate planning strategies for your wealth based on the current low interest rate environment. With a relatively large estate (over $10 million individually or $20 million as a married couple), you may want to talk with your estate planning attorney about the following planning strategies.A Grantor Retained Annuity Trust (GRAT)
Wealth Planning
Created by an experienced estate planning attorney, this transfers significant wealth at a reduced transfer tax cost. This strategy requires a grantor (the person creating the trust) to transfer accounts or property into a carefully drafted irrevocable trust. Your attorney can design the trust to pay the grantor a stream of income at least annually and over a specific term of years. At the end of the specified term, payments end. And any remaining property is transferred (gift tax-free) to a third-party remainder beneficiary. A child or other descendant usually a child fills the role of grantor.
The goal of a GRAT encourages assets in the trust to grow faster (at a higher interest rate) than the low interest rate published by the IRS. This is also known as the Section 7520 rate. Bankers use it to calculate the present value of payments made back to the grantor. When this occurs, attorneys transfer accounts or property remaining in the GRAT to beneficiaries, free of gift taxes.
The following factors can impact the effectiveness of a GRAT:
- The health of the grantor (and whether they will live beyond the GRAT term.)
- The interest rate for the month when accounts or property are transferred to the GRAT
- The nature of the accounts or property contributed to the trust and their growth potential
- The remaining lifetime gift tax exclusion amount available to the grantor
Also important, the creation of a GRAT requires attorneys to file a gift tax return to report the gift. With deliberate planning, however, this amount could be negligible.
A Charitable Lead Trust (CLT) & Wealth
This may offer significant tax savings. Do you intend to make charitable giving a part of your estate plan and legacy? This is particularly true in today’s low interest rate environment. Similar to a GRAT, a CLT is an irrevocable trust that makes payments out of the trust to a beneficiary (a qualifying charity). Executors make payments over a specified period. The period can be a set number of years or for the lifetime of the grantor. Unlike a GRAT, however, a CLT names a charity as the recipient of the annual payments over the trust term. Upon completion of the trust term and payments, the accounts and property remaining in the trust pass to chosen beneficiaries. These often include children or descendants. The gifts are free of gift and estate tax.
Check Back next week, when we conclude this two-part series about how to take advantage of low tax rates where heirs are concerned.
About Skvarna Law in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
