Summer Savings: Estate Planning Opportunities

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies

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Interest rates have become a hot topic these days. The Fed is raising rates, car notes are more expensive, and home mortgage rates seem to be climbing. But this isn’t all bad.

While not often top of mind, there are also interest rate issues in the estate planning world. In particular, there is a government provided interest rate – commonly called the 7520 rate[1] – that many planners follow diligently. And right now, the 7520 rate is rising from its historically low rates (at one point it was 0.8%) with the current rate for August 2022 being 3.8%. This means that in the right circumstances, certain estate planning techniques may be more favorable.

A perfect example of how a rising 7520 rate may be beneficial is a Charitable Reminder Trust[2]. A typical CRT is an irrevocable trust you create where you retain an income stream from the trust either for life or for a term of years not to exceed twenty. At the end of the term, the remaining assets pass to the charity or charities you name in the trust. If applicable, your spouse can participate as a creator of the trust and/or as a participant in the income stream. It is possible to name someone else as the income beneficiary of a CRT that you create but know that doing so is considered a taxable gift for federal transfer tax purposes by you to those beneficiaries.

CRTs are irrevocable trusts, so once created the terms cannot be modified. It may be possible, though, to retain the right to change the charities that will ultimately receive the remaining assets if that clause is drafted into the trust. Once created, the trust would pay you either a “unitrust” amount (the payment is a fixed percentage of the fair market value of the trust with the fair market value recalculated annually) or an “annuity” amount (the payment is a fixed value based on a percentage of the initial value of the trust).

While there are several other strategies and issues in a CRT, for interest rate purposes, the higher the 7520 rate the better the charitable deduction. This is because when you create the trust you must calculate the “present value” of your retained income stream and the “present value” of the value of the remaining assets passing to charity. Part of that calculation utilizes the 7520 rates, and the higher the rate, the higher estimated remainder value, and consequently the higher charitable deduction when you create the CRT.

While we’ve only scratched the surface of this planning technique and the complexities associated with it, the point is that if you are looking to transfer assets in a tax efficient manner, now may be one of the most opportune times in recent history. Rising interest rates, along with the highest estate tax exclusion in history – currently $12.06 million per person – mean that the time to consider planning is now.  Work with your financial advisor, along with your tax and legal counsel, to determine whether you should consider some of these planning techniques. Doing so may lead to a superior after-tax transfer of wealth.

The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.

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[1]  The “7520 rate” is based on IRS Code 7520 which provides an updated rate for each particular month where the rate is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls.   See IRC 7520.

[2] For more on Charitable Remainder Trusts ask your financial advisor about our Charitable Remainder Trust planning piece.