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
When to Settle and When to Fight: A Litigator's Framework
Every lawsuit comes with a cost, and knowing when to settle a lawsuit is one of the most consequential decisions a business owner will face. Experienced litigators understand how to minimize cost and obtain certainty for their clients. For many business owners, the decision is viewed almost entirely through a financial lens: What will it cost […]
Author: Sean M. Pena
A Whistleblower Just Filed a Complaint Against Your Company: Here's What to Do Now
Few situations create more uncertainty than learning that an employee has filed a whistleblower complaint. Questions arise immediately: Is the allegation legitimate? Should the employee be placed on leave? Do we need to notify our insurance carrier? Are we now prevented from disciplining the employee if there are unrelated ongoing work related issues? There is […]
Author: Sean M. Pena
Assignment for the Benefit of Creditors: An Alternative to Bankruptcy for Distressed Businesses
When a business reaches the point where it can no longer service its debts or otherwise resolve its liabilities, management is often faced with a difficult question: is a bankruptcy filing necessary or is there another way to perform an orderly liquidation or sale of the business assets? While Chapters 7 and 11 of the […]
Author: John D. Giampolo
Breaking Down New Jersey’s “Mansion” Tax: What Buyers and Sellers Need to Know
For many years, the New Jersey Mansion Tax has been a significant consideration in high-value real estate transactions. Recent legislative changes, however, have substantially altered how the tax operates, including who is responsible for paying it and the amount owed in certain transactions. Whether you are purchasing, selling, or investing in New Jersey real estate, […]
Author: George McGowan
Estate Planning for Digital Assets Under New Jersey Law
As our personal and financial lives increasingly move online, estate planning must evolve to address a new category of property: digital assets. From email accounts and social media profiles to cryptocurrency and cloud-stored business records, these assets often carry both financial and sentimental value. Yet, without proper planning, they can become inaccessible—or even lost—upon incapacity […]
Author: Marc J. Comer
The Role of Representation and Warranty Insurance in M&A Transactions
In today’s mergers and acquisitions market, representation and warranty (R&W) insurance has become a common feature of deal negotiations. Once used primarily in larger transactions, R&W insurance is now frequently incorporated into middle-market deals as buyers and sellers look for efficient ways to allocate risk and close deals. When structured properly, R&W insurance can help […]
Author: George McGowan
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.