Inflation is rising at an alarming rate and affecting the economy of many states in the United States, including Florida. Whether or not you watch the news, you see how much prices have skyrocketed since coming out of the COVID-19 pandemic. In an effort to mitigate inflation, the Fed has significantly hiked the benchmark rate of its federal funds.

Although the increases mean many kinds of consumer financing will become more expensive, they also make certain estate planning techniques more effective. Thus, while some techniques will become more effective in a higher-rate environment, some will become less effective. This article, therefore, explains the different estate planning techniques that are suitable for environments where interest rates are rising.

• CRAT

Charitable Remainder Annuity Trusts (CRAT) is a technique where the annuity from a trust is payable to a non-charitable beneficiary. However, the rest of the trust is payable to a charitable beneficiary. The non-charitable beneficiary can be anyone, but there is a significant difference when the beneficiary is not the grantor or their spouse.

In such a case, the present annuity value, between five and 50 percent of the asset’s initial value, is considered a taxable gift. Therefore, the present value of what is left, at least ten percent of the transferred assets, will be transferred to the charity.

Like installment sales to grantor trusts, CRAT is most effective when highly appreciated assets are transferred to it. However, CRAT is different from installment sales since higher interest rates are preferable, resulting in higher payouts to non-charitable beneficiaries.

• QPRT

The next technique is the Qualified Personal Residence Trust, which is used to pass a primary residence to the remainder of the beneficiaries. The remainder of the beneficiaries are usually children, and it comes with reduced gift tax consequences. In a high-interest rate environment like Florida, the grantor’s right to use the residence increases in value, lowering the taxable gift value.

In this case, the QPRT grantor retains the right to live in the house rent-free for the QPRT term – between five and 25 years. Then, they will give the remainder of the interest to the beneficiaries.

Using this technique in a high-interest rate environment means there is a lower present value, gift and estate taxes, and gift value. However, to successfully remove the residence value from the grantor’s estate, the grantor must outlive the QPRT term. Furthermore, the taxable gift from the property transfer into the QPRT will reduce the grantor’s unified exemption from gift and estate tax.

• GRIT

GRIT or Grantor Retained Income Trusts technique is a type of irrevocable trust. In this technique, the grantor transfers assets, retaining an interest in all of the trust’s net income for a set number of years. At the end of the term of years or if the guarantor dies, the rest of the assets go to the remainder beneficiaries.

Additionally, the value of the retained interest reduces the value for gift tax purposes, provided the beneficiaries are not the grantor’s family members. Nevertheless, the grantor’s family members only include the grantor’s spouse or the grantor or their spouse’s lineal descendants. Thus, this estate planning technique is great for gifts to relatives and friends who are not members of the grantor’s family.

Conclusion

“CRAT is a particularly effective technique in higher interest rate environments, alongside QPRT, both serving different purposes,” says probate attorney Samah T. Abukhodeir of The Florida Probate & Family Law Firm. Interest rates are cyclical and, as such, the effectiveness of these techniques increases and decreases with rates. Therefore, the grantor needs to be wise and mindful of the various techniques to help them take advantage of changing rates.