What the Low-Interest-Rate Environment Means for Your Estate Plan: Loans to Irrevocable Trusts

{4:10 minutes to read} Going into 2015, we’ve experienced the continuation of what has been a low-interest-rate environment. While this is a good thing for people who are applying for mortgages, it might not be the best thing for your financial plan when it comes to investing. However, it might be a great opportunity for your estate plans.

People are taking advantage of numerous strategies today to create benefits for their financial and estate plans. I would like to go over a couple of ideas on how this low-interest-rate environment can create tremendous income tax and estate tax benefits for you and your family.

In this article, I will discuss loans to irrevocable trusts. My next article will discuss life insurance premium financing.

Loans to Irrevocable Trusts

A lot of people want to make gifts to their children, but there is a *$14,000 annual gift tax maximum and a $5.43 million tax-free lifetime amount for gifts and estate plans. They may also want to use the $14,000 for gifts that their children and grandchildren can utilize today. Rather than making a gift into a trust, we are working with our clients on structuring loans to trusts for the benefit of their children and grandchildren.

For instance, we have a client that is an entrepreneur with some properties in his estate that are growing quite quickly. From his estate, we are making a loan of $1 million to an irrevocable trust.

He has to pay back that loan and can use what is known as the Applicable Federal Rate (AFR) to determine the interest that the trust will have to pay. **He could either use a short-term rate, which is less than a 1/2 a point, or a mid-term rate which is around 2.5%.

When he lent the trust that money, the trust then had the $1 million. He used that million dollars to purchase a piece of property that was generating income in his estate. Now that piece of property is generating income (while owned by the trust), and the income taxes get paid from his estate.

These types of trusts are irrevocable trusts, and are known as Intentionally Defective Grantor Trusts (IDGT). He’s actually burning his taxable estate funds while the money in the trust is growing tax-free for the benefit of his children.

This client is also using the income from these trusts to buy life insurance so that his family has liquidity to pay the tax on his and his wife’s death, and so his properties don’t have to be liquidated at death.

The beauty of all of this is that he is able to do the entire transaction without utilizing any of his $5.43 million lifetime exemption or his annual exclusion gifts. And he is doing this in a way that accomplishes a tremendous amount of benefit to his estate by taking advantage of this low-interest-rate environment.

We’ll be addressing other ways to benefit from the low-interest-rate environment in future blogs. If you feel this type of plan would be right for you, give us a call and we’ll be happy to go over your situation to see how we can create strategies to help protect and grow your wealth.

*Source – Key Numbers for 2015 – Mass Mutual Financial Group

**Source IRS Website March 2015

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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