“A more present sense of one's own mortality may drive those who have not made plans before to begin the process of creating an estate plan. For those who have existing plans, are they up to date? How does the changing economic environment affect prior decisions?”
One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April, 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intra-family lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.
The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intra-family lending has already occurred, these low rates provide a chance to amend the terms of current promissory notes to obtain these rates.
There are two opportunities presented:
• The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
• If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.
Here are a few situations where these loans are typically used:
• Parents extend a loan to adult child, who is going through a challenging financial period.
• Parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.
• Complex estate planning, where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.
These intra-family loans are usually part of sophisticated estate planning. Other methods include Grantor Retained Annuity Trusts (GRATs), or Charitable Lead Trusts (CLTs), which also become more attractive in a low interest rate environment.
With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication. The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.
Speak with our attorneys about how your estate could benefit from the current low interest rate environment.
We can also assist in updating your estate plan, if you haven’t reviewed it in three or four years. If you don’t have an estate plan in place, now is the time to have one created.
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Please call our office anytime for assistance with your Estate Planning, Long Term Care Planning, Medicaid or Special Needs Planning: (718) 238-6960 or firstname.lastname@example.org. We will be happy to schedule an appointment with one of our attorneys.
Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”