Today’s year-end planning tip is Planning in a changing 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 changing interest rate environment.
One of these numbers is the Section 7520 Rate: The 7520 rate is a factor used in making various calculations such as remainder interests, charitable deductions, and minimum thresholds for sophisticated estate planning strategies.
Here’s a Planning tip to chew on: Consider “Rolling Grantor Retained Annuity Trusts” or GRATs, which can be helpful in a changing interest rate environment AND in choppy market conditions. A GRAT is a type of irrevocable trust that allows the grantor to transfer assets and receive annuity payments for a set period of time. Rolling GRATs mean setting up multiple GRATs that can help grantors navigate interest rate fluctuations with greater confidence.
For example: Given today’s still elevated interest rates, a single GRAT might STRUGGLE by not holding investments that outpace the 7520 rate. However, a series of short-term rolling GRATs funded with marketable securities like stocks is likely to thrive regardless of the interest rate backdrop. If the stocks in any one GRAT fail to outperform the applicable 7520 rate, that GRAT fails. In this situation, the donor simply receives their stocks back without penalty and without using much, if any, of their gift tax exclusion. If the stocks in a GRAT outperform the 7520 rate, the net proceeds flow to the donor’s beneficiaries, effectively transferring wealth.