James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Rising Interest Rates Will Make Certain Gifts More Costly
Author: James F. McDonough
Date: July 5, 2013
Key Contacts
Back
Rising interest rates in the Treasury market is a warning that it is about to become more costly to make certain gifts or to sell assets to related parties.
The yield on Treasury securities is used as a yardstick for setting the interest rates that related parties must charge one another when transferring property in a sale. These rates also establish the annuity that must be paid when using a Grantor Annuity Trust (GRAT) or Charitable Lead Annuity Trust (CLAT). The benchmark rates, known as the Applicable Federal Rates (AFR), are published monthly. The benefit of low interest rates was the asset being transferred did not have to generate a great deal of income to make the payment required. Tax planners often refer to the AFR as the hurdle rate for this obvious reason.
Where there is an inter-family sale of an asset, a higher interest rate means the asset must produce more cash or income to make the required payment. Another drawback to an increase in interest rates is that there is less debt service coverage. The income and estate tax consequences of higher payments are also greater because more money is being returned to the seller thereby increasing the size of the estate.
When property is transferred to a GRAT at a time when the AFR is low, the annuity is fixed at a low amount. An increase in the future performance of the asset means there will be an increase, in excess of the required annuity payment, and the excess inures to the benefit of the heirs. Today is a very favorable time to use a GRAT to transfer income producing real estate or a business that are expected to do well in the coming years.
The same reasoning applies to a CLAT which is a trust that pays an annuity to charity for a term of years. The heirs will receive the remainder at the end of the term and any increase in income becomes part of the remainder.
Inflation in asset values is another reason to act today to remove the increase from your taxable estate and pass the increase to your heirs.
- Practices: Tax and Trusts & Estates
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Tariff Response Options for Small Businesses Facing Financial Distress
The Trump Administration’s new tariffs are having an oversized impact on small businesses, which already tend to operate on razor thin margins. Many businesses have been forced to raise prices, find new suppliers, lay off staff, and delay growth plans. For businesses facing even more dire financial circumstances, there are additional tariff response options, including […]
Author: Brian D. Spector
Common Causes of Partnership Disputes and How to Resolve Them
Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]
Author: Christopher D. Warren
Businesses Are Facing Financial Headwinds—A Practical Guide
*** The original article was featured on Bloomberg Tax, April 28, 2025 — As a tax attorney who spends much of my time helping people and companies who have large, unresolved issues with the IRS or one or more state tax departments, it often occurs to me that the best service that I can provide […]
Author: Scott H. Novak
President Trump's Termination of Member Gwynne Wilcox
On January 28, 2025, the Trump Administration terminated Gwynne Wilcox from her position as a Member of the National Labor Relations Board (NLRB or the Board). Gwynne Wilcox, a union side lawyer for Levy Ratner, was confirmed to the Board for an original term in 2021 and confirmed again for a successive five-year term expiring […]
Author: Matthew F. Mimnaugh
Breach of Contract Explained: Types and Consequences
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
Author: Brittany P. Tarabour
How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide
Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]
Author: Christopher D. Warren
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.