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Navigating Financial Strategies: Ways to Adapt to Shifting Interest Rate Landscapes

When interest rates go up, some financial strategies become more beneficial, while others become less appealing. It's a good idea to reassess the strategies you've been using, especially after a significant change in interest rates.

In the past, low-interest family loans were a popular way for tax and estate planning. However, with higher interest rates now, these loans have to come with higher interest charges to avoid tax issues. This makes the strategy less attractive than before.

Similarly, grantor retained annuity trusts (GRATs) used to be popular because they worked well with assets expected to grow quickly, like stocks in small companies. But with higher interest rates, the returns from these trusts aren't as advantageous as they used to be.

On the flip side, charitable remainder trusts and charitable gift annuities become more appealing when interest rates rise. These tools provide income to the taxpayer or designated beneficiaries, with the remainder going to a charity. Higher interest rates increase the present value of the charity's future amount, resulting in a higher tax deduction for the taxpayer.

Another strategy that benefits from higher interest rates is the qualified personal residence trust (QPRT). With a QPRT, a taxpayer transfers a home into a trust, retaining the right to live in it for a set period before it goes to the beneficiaries, usually the taxpayer's children. Higher interest rates lower the value of the gift, making it more tax-efficient to transfer property out of one's estate.

These strategies, known as split interest gifts, involve owning or benefiting from the property for a period before transferring it to beneficiaries or charity. Interest rates, determined by the IRS, play a crucial role in calculating the value of these gifts. Estate planners can help assess the tax benefits of these strategies based on individual circumstances, using software or online calculators.


Please reach out to your financial advisor today with any questions - we are here to help!

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