Wealth Transfer Strategies for a Rising Interest Rate Environment

It is important to consider interest rates when looking into possible wealth transfer options. Since interest rates are expected to increase over the next few years, it may be a good idea to implement appropriate strategies to take advantage of the current rates.

A possible vehicle to transfer wealth is the Grantor Retained Annuity Trust (GRAT). This is an irrevocable trust in which the settlor/grantor places assets into the trust corpus in order to receive an annuity. When the GRAT term is finished, the remaining assets in the trust, less interest, are passed tax-free to beneficiaries.

A Charitable Lead Annuity Trust (CLAT) is similar to the GRAT, except the annuity payments are made to a charity instead of the grantor/settlor. At the end of the trust term, remaining assets must be paid out to non-charitable beneficiaries.

Both the CLAT and the GRAT benefit from low initial interest rates. The IRS sets a hurdle rate that assumes a certain percentage of growth over the course of the trust term. The lower the general interest rate, the lower the IRS rate will tend to be. Any growth over the hurdle rate passes tax-free to beneficiaries; the IRS does not check actual asset growth.

See Wealth Transfer Strategies for a Rising Interest Rate Environment, Trust & Estate Planning, August 9, 2017.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.