Changing interest rates can affect estate planning

On Behalf of | Jul 3, 2018 | Estate Planning And Probate

Trusts are an important part of estate and financial planning for many people in Minnesota. The current interest rates can play a major role in determining which type of trust will be the most beneficial to heirs. After years of lower rates, interest rates are rising, and this trend is expected to continue into the future. As the rates change, the decisions that estate owners make about trusts can also change.

For example, people who have been undecided about creating a grantor retained annuity trust (GRAT) or charitable lead annuity trust (CLAT) may want to act quickly. A GRAT is created for a specific period of time; each year, the person who created the trust receives an income from it. After the period is over, the value remaining in the trust is passed to the creator’s beneficiaries. At this point, the value of the trust is taxable, and those taxes are calculated using a formula that takes the initial interest rate into consideration. Creating these trusts while lower rates are in effect can minimize the tax burden.

A CLAT is similar, except that rather than being distributed back to the trust’s creator, the payment is made to charity each year. During this time, the person who created the trust can utilize this process to obtain a tax deduction for charitable donations.

In addition, people may want to consider other trust options, like a qualified personal residence trust. These trusts are most beneficial during a period of high interest rates. There are a number of factors to take into account when opting for a trust. An estate planning attorney can help a client determine which options are most advantageous.