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Trust Choices Change With Rising Interest Rates

Trusts are an important part of an estate planning strategy for many in Connecticut and across the country. They can offer lifetime tax benefits as well as a way to pass more structured gifts to a person’s beneficiaries. However, the types of trusts that people choose to create may shift due to the rise in interest rates. While interest rates have been historically low for the past 10 years, they are currently rising, a trend that is expected to continue to dominate.

As interest rates change, people may opt for different types of trusts that have been little-used over the past 10 years because they provide the greatest gain in a high interest rate environment. On the other hand, people considering a grantor retained annuity trust or charitable lead annuity trust may want to act quickly in order to preserve current interest rates.

A GRAT is established for a set period of time during which it pays out a fixed annuity each year, reflecting the grantor’s retained interest. After the trust comes to an end, the value remaining is passed to the grantor’s beneficiaries. If the trust is created at a period of a lower interest rate, it can help to reduce any taxes later owed by the beneficiaries without hindering the trust’s capacity to provide for the grantor. A CLAT operates in much the same way although the annual payment goes to a charity rather than to the grantor. This can help to lower the grantor’s tax liability through a deduction for a charitable donation.

There are other types of trusts, like qualified personal residence trusts, that can be useful in a period of high interest rates. An estate planning attorney may work with people considering how to plan their estates to advise them on the best possible trust strategy to maximize positive outcomes for themselves and their beneficiaries.