How Do Interest Rate Changes Affect the Value of My Estate?

Increases in the federal funds rate, which is set by the Federal Reserve, could have a significant impact on your heirs when they inherit your estate. Working with an estate planning attorney and a financial advisor could help you lessen these impacts and the estate taxes that have to be paid to the IRS before assets are distributed.

How Interest Rate Hikes Create Big Impacts on Estate Planning

After years of historically low interest rates that fueled vast economic growth and investments, the Federal Reserve has started to raise interest rates in efforts to combat a looming recession. Economists note that the Federal Reserve increased interest rates by 0.75% in June and July, and they expect the interest rate to increase by a total of 3.4% by the end of 2022. This could impact the inheritance you provide to heirs and the federal estate and New Jersey inheritance taxes that have to be paid, but working with an estate planning lawyer could help you minimize those impacts.

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What Parts of an Estate Do Interest Rate Increases Impact?

Increases in the federal funds rate affect split interests. A split interest is when the recipient of an asset is a different person from the beneficiary of the remainder. Some split interest strategies used in estate planning include life estates, term interests, reversionary gifts, private annuities and remainder interests. The value of the current or remainder interest of the asset is set by the IRS, and it is tied to the federal funds rate. A small increase, such as 0.25%, can have a big impact when the asset has a large value.

Which Types of Estate Planning Strategies Are Affected By Increased Interest Rates?

Several types of estate planning strategies used to offset tax impacts are impacted by increases in the federal funds rate. Grantor Retained Annuity Trusts, or GRATs, are impacted if you’re trying to get around the gift tax. Charitable Lead Annuity Trusts are also impacted. You would have to reach the higher charitable deduction required by the IRS when the federal funds rate increases. Private annuities are another strategy impacted by increases in the federal funds interest rate. When you retain the right to the annuity yourself, it could impact your current tax rate and the amount you owe to the IRS.

Estate Planning Strategies That Benefit From Higher Interest Rates

Not all estate planning strategies are negatively impacted by an increase in the federal funds rate. If you use a Grantor Retained Income Trust for illiquid assets like artwork, collectibles or agricultural land, the increase in the interest rate increases the amount of current interest, which then decreases the value of your taxable gift. If you use a Charitable Remainder Trust in your estate, a higher interest rate will be used by the IRS when it determines the payout rate of the annuity to the grantor.

Actions to Take With Higher Interest Rates on the Way

You may need to speak with your financial advisor and an estate planning lawyer in order to confirm that your current estate planning strategy is financially sound and viable for you and your heirs. This might be a good time to consider some changes in your strategy. For example, if you have a Charitable Remainder Trust set up, you might want to look into allocating more of your assets to it because the charity could get a higher payout thanks to the higher interest rates. On the other hand, if you have or plan to use a private annuity, now might be the time to lock in an interest rate before the Federal Reserve institutes any additional increases.

Interest rate changes may impact the amount of federal estate and New Jersey inheritance taxes, both of which will affect your heirs. When you set up an estate plan with an estate planning lawyer, you can work to ensure that your plan takes interest rate changes into account. For more details about the ways interest rate changes could affect your New Jersey estate plan, get in touch with The Knee Law Firm in Hackensack at 201-996-1200, and schedule a consultation. You may also fill out our online contact form, and an office associate will contact you to set up an appointment.