Trusts can be used to lower impact of rising interest rates

| Dec 31, 2015 | Trusts |

It is important for Michigan residents to understand the economic climate that the country is facing. By understanding big picture issues, people can better plan how to use these situations to their advantage. The past decade, America has seen a deep recession and an economic recovery. While people may not realize it, this has a huge effect on their estate plans. A big part of estate planning must include how a person’s assets will be distributed after the person has passed.

One effect of the recent recession was that interest rates in the United States were extremely low. These low interest rates were an advantage for many people and may have helped the economy rebound. As the economy gets stronger, the Federal Reserve had decided to raise interest rates.

Increasing interest rates can have a negative effect on a person’s immediate and long-term financial health. People should revisit their estate plans to ensure that they are taking advantage of estate planning and tax planning tools like trusts to minimize the impact of higher rates.

There are many trusts that Michigan residents may want to consider. First, grantor retained annuity trusts can be used to minimize the effect of increasing interest rates. A GRAT allows certain income generated from assets to pass to heirs without estate taxes. However, only assets that appreciate at a certain rate will qualify for this treatment. These GRATs can lock in low interest rates to determine the amount that passes tax free.

Second, Michigan residents may be able to use a qualified personal residence trust to reduce the impact of rising interest rates. These freeze the value of property that is transferred despite changing interest rates.

Finally, a charitable remainder annuity trust might also help as interest rates increase. In these cases, as interest rates increase, so does the value of the gift and the tax deduction.

Understanding how the economy and estate plans work together can be difficult. However, by frequently reviewing estate plans, people can ensure they are in the best possible position.

Source: The Wall Street Journal, “Estate Planning: How to Adjust to Rising Rates,” Veronica Dagher, Dec. 23, 2015