Friday, September 25, 2020

How Historic Low Interest Rates Can Work in Your Favor

By Carol K. G. Lutz, LL.M., Law Clerk, Morris Law Group

The 7520 rate in September 2020 is the lowest rate seen historically, a mere 0.4%. Just a few months ago in February, it was 2.2%. Just as we said back in March that such low rates made it the perfect time to create charitable lead annuity trusts (CLATs) and grantor retained annuity trusts (GRATs), now it is even more opportune than ever before. For comparison, the 7520 rate in February of 1995 was 9.6% and it was 11% in June 1990. May of 1989 had the highest rate in modern history of 11.6%. 

For illustration, forming a 20-year CLAT right now with $1 million with a payout of 5.23%, assuming an 8% growth rate, would result in growth of over $2.3 million, a total payout of $1,042,600 for charity and a remainder of $2,275,385 for your descendants transfer-tax free. Click here to read more about the benefits of the current low-rate environment or watch an important video about it by Stuart R. Morris, Esq., CPA, B.C.S. 

Forming a 10-year GRAT using the same numbers and growth assumptions results in growth of $704,883 with the grantor getting an additional $22,190 from his or her initial investment and passing $682,754 transfer tax free to descendants.

With the annual growth rate, in this example assumed to be 8%, being so much larger than the 7520 rate, this maximizes the amount of money that will be passed to descendants transfer-tax free. The difference in the annual growth rate and the 7520 rate is what gets passed to descendants without a transfer tax.

Put simply, with the 7520 rate being at a historical low, proper use of CLATs and GRATs may result in huge tax savings.

For more information about trust-based estate planning, please contact Morris Law Group or call us at (561) 750-3850.

No comments:

Post a Comment