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Practical Planning Tip: Planning to consider in a high interest rate environment

December 12, 2023

Today’s year-end planning tip will cover types of Planning to consider in a high interest rate environment:

So, Interest rates are important for more than just lending and bond investments. There are several types of estate planning strategies that use numbers derived from the federal funds rate and may be beneficial in this high-rate environment.

One of these numbers is the Applicable Federal Rates or AFRs: The Treasury issues the short-term, mid-term, and long-term AFRs each month based on interest rates. These rates attach to promissory notes when loans are made among family members without banks involved.

Another is the Section 7520 Rate: The section 7520 rate is a factor used in making various calculations such as remainder interests, charitable deductions, and minimum thresholds for sophisticated estate planning strategies.

Planning tip: Consider a charitable remainder trust or a CRT: Which is one strategy that may become more appealing in light of high interest rates.

A CRT combines philanthropy with tax planning. It is an irrevocable trust that pays an annual payment to an individual during the term of the trust, with the remainder passing to one or more named charities. Since the value of the grantor’s retained interest is lower when the Section 7520 rate is higher, the value of the interest passing to charity, and, therefore, the grantor’s income tax deduction, is higher. Furthermore, the grantor’s taxable estate is reduced by the assets gifted to the CRT, as well as all future appreciation on such assets.

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