Every month, the IRS quietly makes a mostly-unheralded announcement of the current Applicable Federal Rate (AFR) for determining the present value of an annuity, an interest for life or a term of year, or a remainder or reversionary interest under Section 7520. Ha! If you made it through that sentence, then you already know why this announcement goes mostly un-noticed by most mainstream media!

However, if you are charitably-inclined, or want to make a large, nontaxable gift to your heirs, it could be very important for you to know that the November rate is set at an all-time low of just two percent. This low rate makes certain estate planning strategies, such as grantor retained annuity trusts (GRATs) and charitable lead trusts (CLTs) quite attractive, especially in light of the return of the estate tax next year.

GRATs and CLTs involve a mix of income streams and gifts to beneficiaries. With both types of trusts, current interest rates influence how much income can be generated while still enabling you, the donor, to make a nontaxable gift.  The lower the rate, the less income you take from the trust each year, and the larger your eventual tax-free gift.

These strategies generally appeal to people who have enough current income from other sources and whose goals are to maximize their non-taxable gift.

Investor’s Business Daily last week had an excellent article explaining these strategies, both the benefits and the potential pitfalls.

I am encouraging appropriate clients to establish these types of trusts now, before interest rates start rising. For more information about charitable planning, you may want to read the September issue of our newsletter, “Charitable Opportunities”  Also, be sure to visit our Website, where we discuss the VA Benefits, Medical Assistance, Medicaid, and Life Care Planning.

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