Trusts Based on 7520 Interest Rates are Back in the Limelight

OK, maybe they’re not exactly center stage yet, but since the 7520 rate for January 2006 is 5.4% (compared to a paltry 3% in July of 2003), trusts dependent on this rate are at least gaining more attention.

Even small fluctuations in the 7520 rate may have a tremendous impact on what your heirs will receive or what will be due in taxes. Trusts that transfer real estate and those designed to assist couples who are not married are becoming more attractive as the 7520 rate increases.

The type of trust appropriate for you depends not only on interest rates, but also on how old you are, how healthy you are, what type of assets you intend to bequeath, how much control you want to maintain, and if you want to leave something to a charity.

Below is a brief overview of a few common trusts and how they are affected by interest rates:

Qualified Personal Residence Trust (QPRT). QPRTs are typically in effect for about ten years and upon termination, your residence passes to your children. QPRTs allow you to pass future increases in the value of your home to your beneficiaries without gift or estate taxes.
Retained Income Trust (GRITs). GRITs are typically used by those who want to bequeath assets to more distant relatives (i.e., nieces, nephews, cousins, etc.) or for unmarried couples who want to ensure their partner is provided for. Typically, these trusts are funded with securities – ideally those that don’t pay much in income which allows more capital to remain in the trust, thus leaving more for your beneficiaries. Also, when the trust terminates, if you are still alive, funds will go directly to your heirs bypassing your estate.

With both QPRTs and GRITs, you will pay a gift tax on the funds intended for your beneficiaries, but as the 7520 rate increases, the discounted value of the gift decreases and, voila, your tax bill is less.

Charitable Remainder Annuity Trust (CRAT). If you have a large quantity of stock that has appreciated and you want to diversify without having to pay a capital gains tax (and you intend to leave funds to a charity), a CRAT may be the way to go. By placing the stock in a CRAT, you don’t own it anymore, and because the trust benefits a charity, the charity can sell the stock without incurring a tax. The charity can then reinvest the proceeds and you will benefit from the new diversified investment as these types of trusts require a fixed distribution to you. When you create the CRAT, you are allowed to take a deduction on the amount going to the charity, so if interest rates are higher and the amount paid to you is fixed, the IRS reasons more will be going to the charity, consequently, you get a larger deduction.

As always, please seek the advice of a professional estate planner when evaluating your options as there are many factors to be considered when assessing a suitable trust.

Source: BusinessWeek.com, 1-30-06

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