How to Account for Interest Rate Increases in Your Illinois Estate Plan

 Posted on November 12, 2020 in Estate Planning

When you are setting up your Illinois estate plan, it is important to consider more than just the laws that exist today. It is also a good idea to plan accordingly for rising interest rates. Of course, it is impossible to predict the future. However, there are some wealth-transfer strategies that could minimize the impact of estate taxes while also offering some additional tax breaks to trustees later on down the road.

Using Intra Family Loans

Some families opt to provide an intra family loan to their adult children, or they may transfer a promising investment to pass down an inheritance. Paired with a promissory note that requires the adult child to pay interest, the net returns of these investments are a tax-free transfer of wealth.

When using this form of asset transfer in your estate plan, it is important to understand the rules and potential pitfalls. For example, interest rates must adhere to the minimum requirements (currently 0.14 percent to 1.47 percent depending on the term of the loan) and increases in interest rates would necessitate a higher rate of return to achieve profit. For some, this may make this form of transfer less desirable.

Personal Residence Trusts

When rates are higher, one of the more attractive options for transferring wealth is the qualified personal residence trust. This enables the setup of a trust that will pass a primary residence or vacation home to your heirs while you are still occupying it. It also freezes the value of the property for eiher gift or estate tax purposes, which will inevitably be lower in a high rate environment.

Annuity Trusts

Two of the most commonly used annuity trusts include grantor retained annuity trusts (GRATs) and charitable remainder annuity trusts (CRATs). Both are designed to pass down funds with the least amount of estate tax burden possible. However, each operates very differently.  

GRATs are typically used to pass down appreciating assets to heirs. Set up over a term of at least two years, these annuities are funded using assets with high growth potential. The grantor of the trust receives payments that equal the original value of the asset, plus market-based interest rates (determined by current tax rules). Excess return payments are then passed down to heirs free of gift and estate taxes.

CRATs are very different in the fact that they are used to pass down assets to named charities. However, just like with GRATs, the grantor continues to draw income from the annuity during his or her lifetime. A tax deduction is provided at the time of funding, and any remaining interest is ultimately passed down to the charity. Higher interest rates value the income stream as lower for the charity, providing potentially bigger tax breaks for the grantor.

Contact a DuPage County Trusts Attorney for Help

In a world where state and federal estate tax laws are complex and sometimes even contradictory, it is important to develop a viable and effective estate plan. This becomes increasingly true when you consider the fluctuation and possible raising of interest rates. But where do you even start? How do you determine which option is best for your future, and the future of your heirs? Armed with decades of combined experience, the team at A. Traub & Associates offers creative estate planning solutions. Dedicated, insightful, and highly communicative, we take a proactive approach to helping you create a financial future for your heirs, and we do so by pursuing the most efficient options available. Learn more by scheduling a confidential consultation with our skilled Lombard, IL estate planning attorney. Call us today at 630-426-0196.

Sources:
https://apps.irs.gov/app/picklist/list/federalRates.html
https://www.kiplinger.com/article/credit/t065-c032-s014-intrafamily-loans-the-good-the-bad-and-the-ugly.html
https://www.investopedia.com/terms/g/grat.asp
https://www.investopedia.com/terms/c/charitable-remainder-annuity-trust.asp