Gift and Charity Planning in a Low Interest Rate Environment
Interest rates can change the outcome of most types of deferred gift strategies. For a GRAT, CLAT, CRAT, or sale to an IDGT, the particular interest rate can make the strategy work or cause it to fail. Think of the interest rate as the hurdle rate - if the gift can jump the hurdle, then the strategy works. With the current low interest rate environment, it may be beneficial for your overall estate planning goals to look at these different types of gifting strategies:
GRAT: Grantor Retained Annuity Trust
The purpose of a GRAT is to get appreciation away from the grantor while allowing the grantor to retain the annuity stream. The appreciation must beat out the IRS required interest rate to make this technique useful. The Grantor places assets into the trust, receives an annuity stream and at the end of the term of the trust, the trust property is distributed to the beneficiaries. If a Grantor dies prior to the term ending, the entire amount of the GRAT is included in the Grantor’s estate.
IDGT: Sale to Intentionally Defective Grantor Trust
The purpose of the IDGT is to get appreciation away from the grantor. Here the grantor “sells” property to the trust and signs a note for 90% (10% is a gift to make payments on the note). Growth needs to be more than the Applicable Federal Rate (AFR). The early death of the Grantor will cause the note to be included in the grantor’s estate but not the trust assets.
CLAT: Charitable Lead Annuity Trust
The purpose of a CLAT is to transfer assets to a charity and get the appreciation out of the grantor’s estate. Create a trust with a certain payout to charity. During the term of the trust, the charity, rather than the grantor, will receive assets from the trust. The key benefits are that the CLAT may make payments to the charity that the Grantor was making anyway while the trust can compensate for IRS revaluation of assets and the interest rate to beat is very low. You can also change charities at will so it can be very flexible.
CRAT: Charitable Remainder Annuity Trust
The purpose of a CRAT is to transfer assets to charity and also get appreciation out of the grantor’s estate. An upfront charitable deduction is available. However, low interest rates make the deduction much lower.
For more information on these complex gifting strategies, contact the knowledgeable estate planning attorneys at Stouffer Legal in the Greater Baltimore area.
