Did you know that a low-interest-rate environment can open the door to powerful wealth transfer and tax-saving opportunities? For high-net-worth individuals, leveraging today’s rates can make advanced estate planning strategies more effective than ever.
The IRS establishes annual rates (known as the Applicable Federal Rates or AFRs) that are used to calculate the interest for loans, trusts, and other estate planning vehicles. When AFRs are low, certain strategies become particularly advantageous because:
🔹 Wealth can be transferred at lower costs.
🔹 Assets have more room to grow outside the estate.
🔹 Tax liabilities on transfers are minimized.
This creates a golden opportunity for families looking to secure their financial future and reduce their estate tax burden.
Here are 3 strategies to consider in a low-interest rate environment:
1️. Grantor Retained Annuity Trusts (GRATs):
GRATs allow you to transfer appreciating assets to heirs with minimal gift tax exposure. You retain income for a set period, and if the assets outperform the IRS interest rate, the excess growth passes to your beneficiaries tax-free. For example, a $5 million stock portfolio transferred to a GRAT could yield substantial tax-free gains if it appreciates faster than the low IRS interest rate.
2. Intra-Family Loans:
Low interest rates allow for intra-family loans at minimal costs, providing a powerful tool for transferring wealth while maintaining liquidity. Children or other family members can use these loans to purchase assets or invest, with future growth occurring outside your estate. The interest rate charged on the loan is significantly lower than commercial rates, reducing financial burdens on your family members.
3. Installment Sales to Intentionally Defective Grantor Trusts (IDGTs):
An IDGT allows you to sell appreciating assets to a trust for the benefit of your heirs while receiving payments over time. The low interest rate minimizes the cost of the installment payments, maximizing the tax-free transfer of asset growth. Combine this strategy with assets expected to appreciate rapidly, like business interests or real estate.
Interest rates don’t stay low forever. As they rise, the cost of these strategies increases, reducing their effectiveness. Acting during a low-interest-rate period ensures you lock in maximum tax savings and wealth transfer benefits.
If you’re wondering how to take advantage of today’s low-interest-rate environment in your Oklahoma estate plan, now is the time to act.