How to Take Advantage of Historically Low Interest Rates for Estate Planning Purposes

Aura Wealth How to Take Advantage of Historically Low Interest Rates in Estate Planning

In 2017, estate planning legislation passed by Congress made it easier for Americans to provide tax-free financial gifts to their children and grandchildren. That legislation granted a 40 percent levy to those with the largest amount of inheritance money. It also made more people eligible to avoid the gift tax and the United States estate tax.

When the coronavirus pandemic hit the United States in late February 2020, interest rates plunged quickly and equity markets suddenly became volatile. This has created great opportunity in the investment market, even among businesses forced to have their employees work from home.

Just How Low Are Interest Rates Right Now?

As of May 1, 2020, the estate planning interest rates determined by the Internal Revenue Service (IRS) are as low as they have ever been. The Section 7520 rate, for example, is currently at 0.8 percent. It was 1.2 percent in April 2020 and remained steady at two percent during most of 2019. Prior to the recent low rate of 0.8 percent, the previous low was 1 percent just over seven years ago in January 2013.

How to Take Advantage of Low Rates While You Can

If you have family members whom you plan to provide with an inheritance later, you can loan them cash or other assets now while the interest on repayment terms is at a historic low. Your beneficiaries can then invest the money and profit from higher interest rates once the pandemic passes.

There’s no limit on the dollar or asset amount you can loan to your beneficiaries. Even better, they can lock-in the 0.8 percent rate in place right now for years to come. The current interest rate set by the IRS for loans spanning three to nine years is 0.58 percent. Long-term loans, described as any loan longer than 20 years, has a standard rate of 1.15 percent.

Benefits of Choosing a Long-Term Loan

Although long-term loans come with a higher interest rate than short-term ones, they also allow your heirs to lock in the historically low interest rate for at least two decades. A long-term loan also doesn’t go against the gift tax and estate exemptions of the United States in most cases. Thanks to the 2017 estate planning tax changes, individuals can now donate up to $11.6 million dollars to family members while couples can pass on up to $23 million.

Some people passing on money choose to use the Grantor Retained Annuity Trust (GRAT). With this program, the beneficiaries of your money can profit from any investment gains in the future. They don’t incur the risk of financial loss if they receive returns at a higher rate than what the IRS requires. With interest rates so low currently, your heirs stand to earn a lot of money in the future.

The Future Remains Uncertain

Not only does the coronavirus pandemic make the future uncertain, the 2020 presidential election does as well. If Joe Biden, the current Democratic contender, defeats President Donald Trump in his bid for re-election, he has stated that he is in favor of closing loopholes for estate taxes. That makes it all the more important to act now if you plan to pass on a large sum of money to children or grandchildren. We welcome you to contact Aura Wealth Advisors today to request an appointment.