Estate Planner Jul-Aug 1997
Many estate planning techniques are interest-rate sensitive — the perceived benefits increase or decrease as interest rates change. Projecting whether interest rates will go up or down often will help you make gifts that remove the most value from your estate at the least tax cost — the underlying goal of any gifting program.
How Do Interest Rates Affect Your Gifts?
The applicable federal rate (AFR) is determined by the U.S. Treasury each month based on fluctuations in market interest rates. All planning techniques involving annuities, interests for a term of years, interests for life, or remainder or revisionary interests can be greatly affected by the AFR. Why? The value of the gift for tax purposes is determined with tables that use an interest rate of 120% of the midterm (more than three years but not more than nine years) AFR.
Case Study: Qualified Personal Residence Trust (QPRT)
Under a QPRT, you transfer your principal residence or vacation home into a trust for the benefit of your children or others while retaining the sole right to use the residence for a specified term. The value of your gift is equal to the current fair market value of the residence less the present value of your right to use the property during the reserved term. You use present-value tables to leverage your gift and shift all future appreciation out of your estate.
Example: You have a residence or vacation home worth $500,000. You want to transfer it to a QPRT, retaining the right to use the residence for a term of 10 years (with no reversion if you do not survive).
If the The value The value 120% of your retained of your AFR is interest is gift is 6% $220,803 $279,197 10% $307,229 $192,771 14% $365,128 $134,872
Conclusion: QPRTs are more efficient when interest rates are higher.
Time Is Money
For gifts to noncharitable trusts, you want their value for gift tax purposes to be as low as possible. By considering interest rate trends, you may be able to make the most (or least) of your gifts by timing them right.
For more information on how timing can affect the tax benefits of your gifts, including gifts to charitable trusts, contact us at the number above. We will send you a complimentary copy of the in-depth report “Time Your Gifts To Gain Maximum Tax Benefits.”