Although the Federal Reserve continues to threaten to raise interest rates, current rates issued by the IRS applicable to estate planning transactions remain at historically low levels. For October, the long-term AFR is 1.95%, and the Section 7520 rate, which is essentially the IRS’s assumed rate of return, is only 1.6%. Such low rates make Grantor Retained Annuity Trusts (GRATs) and sales to grantor trusts very attractive because any appreciation in the value of the transferred assets in excess of the IRS’s assumed rate will accrue to the beneficiaries free of transfer tax. New proposed regulations issued by the IRS could severely limit the discounts applied to transfers of family business interests in the future. Therefore, the time is right for clients to use GRATs and grantor trust sale techniques to transfer business interests out of their taxable estates.

The current low interest rates make a Qualified Personal Residence Trust (QPRT) less attractive because the low assumed rate of return produces a lower retained interest, thereby generating a larger taxable gift on the larger remainder interest. Thus, while a QPRT may still be an attractive technique for a home owned in an appreciating real estate market, the current economics of a QPRT are less favorable than a GRAT.

As the end of the year approaches and clients consider year-end tax planning, please keep interest rate sensitive techniques in mind because they may be more favorable in 2016 than they will be next year. If you have questions regarding the above techniques, please contact Jeff Gehring in our Lexington, Ky. office at 859-899-8713.