October’s Internal Revenue Service interest rates are lower than ever, which financial experts say creates a winning opportunity for estate planning in regards to taxes. Interest rates related to asset transfers and private loans are adjusted monthly by the IRS and have dipped to the lowest level on record.
Interest rates are categorized by time, from short-term rates of less than three years to long-term rates that apply beyond nine years. The October 2011 short-term interest rate set by the IRS is 0.16 percent. The midterm rate, for three to nine years, is 1.19 percent. The long-term rate has dropped to 2.95 percent. Blended rates for the month are at an all-time low of 1.4 percent. Specialists say asset protection strategies are ripe between the recent drop in interest rates and the low valuation of assets. Some experts say that now may be the best time to reap maximum tax benefits by formalizing private loans between family members.
Parents who wish to help adult children fund an ambitious purchase like a home may arrange to set up a loan that incorporates the $13,000 cut-off for yearly gift-tax exclusion. For interest-only loans between family members, mortgage-interest tax deductions can be obtained on a private loan as long as they are in accordance with state laws.
For the wealthiest taxpayers, the low IRS interest rates encourage the creation of a grantor-retained annuity trust, or GRAT. Stocks or other assets are placed in a short-term trust from which the owner receives an annuity. At the end of the term, the original owner of the assets reclaims them, but any appreciation that exceeded the interest rate may be handed over tax-free to heirs. The economic combination of low asset values and low interest rates means an heir has the potential to benefit tremendously through asset appreciation in a GRAT.
Source: smartmoney.com, “Low Interest Rates Can Be a Boon to Taxpayers,” Laura Saunders, Oct. 3, 2011