As interest rates fluctuate, individuals should revisit their trust-planning strategies. Certain types of trusts tend to provide better value than others in high interest rate environments. Georgia residents may consider updating their estate plans to include a charitable lead annuity trust (CLAT) or grantor retained annuity trust (GRAT).
Generally speaking, a CLAT combines a trust and an annuity, with the annuity payment going to charity. The trust part of the CLAT is created for a predetermined time, at the end of which it expires. Typically, a primary goal of a CLAT is to allow the maximum value for charitable donations. If there are trust earnings over and above the annuity payment, that value passes to the beneficiaries of the trust. Once the trust’s term is complete, any remaining value passes to the beneficiaries as well.
A GRAT is a similar structure, but the annuity payment goes to the grantor each year. A lower interest rate reduces the taxable value of gifts to beneficiaries, which reduces liability for gift tax. The assets placed in a GRAT need to outperform the Section 7520 interest rate for the month in which the GRAT was established in order for the structure to be considered successful.
A qualified personal residence trust (QPRT) may also begin to make more sense as interest rates rise. With a QPRT, the grantor transfers his or her residence into the trust for a specified term but holds on to the right to live there.
For individuals who are considering updating their estate plans, an attorney could help. Legal counsel with experience in estate planning law might examine the client’s situation and suggest structuring options to maximize value and minimize tax burdens to beneficiaries. An attorney might draft the necessary legal documents to establish a valid trust under Georgia law.