Consider Revitalizing Your Wealth Plan
Much as a hurricane disrupts more than a community’s topography, changing interest rates a ect more than current borrowing costs. Volatile nancial markets, like swi weather systems, may cause short term losses while setting up for potential economic rejuvenation. High net worth families should prepare to weather investment impacts, as well as consider how higher interest rates may require refreshing the techniques relied upon to meet other nancial objectives. Morgan Stanley’s Family O ce Resources group points out “some of the most common interest rates, adjusted monthly and used by the IRS to make certain calculations, have been lower than 1% and as high as 9.8%”. 1 A range that wide can cause meaningful changes in outcomes. As such, now is a good time for a deep dive and review of income tax and estate planning strategies. Especially given the end of a period of historically low rates and a move to what could be a “higher for longer” rate cycle. 2 e impact can be demonstrated by comparing two commonly used charitable gi strategies: lead annuity and remainder annuity trusts. ese are considered split interest trusts because they divide an investment into two parts: the ending value of the asset that funds the trust and a cash ow periodically distributed from the trust. Generally: 3 I. Lower interest rate environments make CLATs more favorable, while II. Higher interest rate environments make CRATs more favorable.
rough a CLAT a donor irrevocably transfers proper- ty to a trust for a term of years, makes a gi of an annuity interest (cash ow) in the trust property to a charity and makes a gi of the trust remainder to a bene ciary (typi- cally themselves or younger relatives). Both gi s are valued using an IRS benchmark discount rate. e amount of the bene ciaries’ taxable gi is the market value of the prop- erty transferred to the trust less the value of the retained annuity. e amount of the charitable gi , and the corre- sponding deduction, is the value of the retained annuity. 1 • e transaction can be structured so that the present value of the annuity gi ed to the charity equals the market value of the property transferred to the trust (zeroing out the CLAT). 1 • A lower interest rate decreases the value of the annuity being paid to charity and increases the value of the gi of the remainder. 1 • Transfer tax savings are achieved where the property transferred to a CLAT appreciates at a rate greater than the IRS discount rate used in valuing the income and remain- der interests. A lower discount rate means a lower hurdle for transfer tax savings. 1 • Example: Donor, 60, transfers property worth $5 million to a CLAT giving a $568,346 annuity to charity for a 10-year term when the IRS discount rate is 2.4% (zeroing out the CLAT). 1 1 e Impact of Interest Rate Changes on Estate Planning (CRC 3893632 12/2021) 2 Lisa Shalett – e GIC Weekly: An Ination Boomerang? 3 Topics in Wealth Strategies: Trust Tax & Estate Strategies in a Rising Rate Environment (CRC 4337771 03/2022) 4 Income and Estate Tax Planning Toolkit (CRC 3893593 02/2022) 5 Family O ce Resources Group: Wealth Planning Illustration – CRAT (CRC 3378632 01/2021)
Exhibit A: Charitable Lead Annuity Trust (CLAT) 4
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MindBodySoul.media | Spring 2023
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