Planning in a Low Interest Rate EnvironmentApril 10, 2012
Although the future of the estate tax is murky at best, the present continues to be an appropriate time to take advantage of certain wealth transfer strategies. The interest rates in March remain historically low, and the Section 7520 rate remains unchanged from February at 1.4%. One technique that works extremely well in this environment is the grantor retained annuity trust, or GRAT. A GRAT is an irrevocable trust into which the grantor, or creator of the trust, transfers assets and retains the right to receive, at least annually, an annuity amount for a specified term. At the end of the term, the remaining assets in the trust pass to the grantor’s designated beneficiaries tax-free. The annuity payments paid back to the grantor from a GRAT established today are calculated based on the 1.4% Section 7520 interest rate. The benefit of this low interest rate environment is that, if the assets transferred to the GRAT grow at a rate greater than 1.4%, the GRAT becomes a powerful tool for passing assets to the designated beneficiaries without incurring significant gift or other transfer taxes.