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High interest rates influence trust planning strategies

Interest rates are expected to increase for the near future in Florida and throughout the U.S. After a decade of consistently low interest rates, the market conditions now signal a change for financial advisors. Advisors must recognize the new era that they are in and tailor their trust planning advice accordingly. Since the environment is right for trust planning, reviewing grantor retained annuity trusts and charitable lead annuity trusts is recommended.

In a GRAT, the trust is combined with the annuity. The trust is set up for a specified number of years. Each year, it pays the grantor a certain amount annually. In addition, the named beneficiaries receive a portion of the estate. The fair market value of the property being transferred into the GRAT is based off the current market value of the property named in the GRAT less the retained interest. Interest is calculated using the annuity stream retained over the life of the GRAT.

CLATs are similar in design. Payments are granted to a charity and maximize the value of the deduction for any charitable donations. The remaining funds not granted to a charity are transferred to the beneficiaries. Since interest rates are locked in the moment property is transferred to the CLAT, the current financial environment could be beneficial to grantors. Any performance gains achieved will transfer to the non-charitable beneficiaries without tax penalties.

A trust strategy should address the client’s specific estate planning needs. If one is considering setting up a CLAT, GRAT or any other form of complicated estate planning, an attorney could provide valuable assistance. Legal counsel may design the appropriate estate planning strategy based on the client’s specific goals.