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Rising Interest Rates Poised to Impact Estate and Wealth Transfer Planning Strategies
By Keith Grissom on June 16, 2022 at 9:00 AM

The June 2022 decision by the Federal Reserve to raise the federal funds rate by 0.75 percent marks the largest such increase in 28 years. Among the many areas this move will affect are estate and wealth transfer planning, as many common strategies have an interest component that can have a significant impact on the success of the strategy.

The June increase in the federal funds rate – to a range of 1.5 percent to 1.75 percent – has an indirect impact on many other interest rates, including the Applicable Federal Rate (AFR), which is the minimum rate that may be charged to avoid a gift. Planning strategies such as Grantor Retained Annuity Trusts (GRATs) that use the Section 7520 rate (120 percent of the mid-term AFR) and installment sales to Intentionally Defective Grantor Trusts (IDGTs) that typically use the AFR to determine the interest charged on the loan, provide a greater wealth transfer benefit when the AFR is lower.

In light of increasing rates, it is important to take advantage of these planning opportunities now before rates continue to rise. Other planning options that have somewhat gone out of fashion in the low-interest-rate environment, such as Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Annuity Trusts (CRATs), may see a resurgence as interest rates rise.

For more information about how to consider the impact of interest rate changes on your estate and wealth transfer planning, please contact someone in our Trusts & Estates group.

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