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Estate Planning Opportunities as Interest Rates Rise (and While They’re Still Low)

Philadelphia Estate Planning Council | May 7, 2015
By: Kevin S. Koscil

Interest rates are an important component of many tax efficient wealth transfer strategies. Some strategies work better in a low interest rate environment, such as the one we’ve enjoyed over the last several years, while others are more suitable when interest rates are high. As the Federal Reserve signals an upward trend in interest rates, it is a good time to examine the strategies that will become less and less effective, and those that will come to the fore. For deploying the strategies in the former category, now seems to be as good a time as we are likely to see for a while since rates still remain historically low.

Generally speaking, two interest rates are going to be important in this discussion: the Applicable Federal Rate (“AFR”) and the rate prescribed by Section 7520 of the Internal Revenue Code (the “Section 7520” rate). The AFR is, among other things, the rate at which intra-family loans must bear interest to avoid implicating the gift tax regime; intra-family loans that do not bear adequate interest are deemed to be disguised gifts to the extent of the interest rate discount. The Section 7520 rate is important for so-called split-interest transfers, which are discussed in more detail below.

This article discusses the effect of interest rate fluctuations on several tax efficient wealth transfer strategies, beginning with intra-family loans, followed by several varieties of split-interest transfers. It should be noted that this discussion necessarily does not analyze all of the elements of the strategies referenced; rather it seeks to highlight the way in which interest rates affect a few selected strategies and, by doing so, provide a framework for analyzing how interest rates will affect other strategies.

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This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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