Estate Planning Techniques in a Higher Interest Rate Environment

Diving into estate planning amidst fluctuating interest rates can feel like navigating a canoe in choppy waters. In the past few years, we have seen the federal funds benchmark rate climb a ladder that seems a bit slick— and unpredictable. 

Understanding these changes is crucial since they affect everything from trust performance to estate taxes. Stick around as we discuss some savvy techniques that could buffer your estate plan against the wobbly backdrop of higher interest rates.

The Impact of Soaring Interest Rates on Your Estate

The best place to start our journey is zeroing in on how these climbing interest rates directly impact your plans for the future—not just for you but for your heirs as well. When rates tick upwards, borrowing costs escalate. That means if your estate involves significant debt levels, the cost to carry that debt can gnaw away at the value you hope to pass on.

Moreover, higher interest rates often mean higher yields on fixed-income investments like bonds. Sounds good initially, right? However, this could alter the attractiveness and valuation of other assets within an estate—like stocks or real estate—which might not perform as well in a high-rate environment. 

Exploring Trusts in High-Rate Scenarios

After understanding how jacked-up rates reshape the landscape, it’s time to pivot to some tactical moves. Consider trusts—these are not just legal documents but strategic tools that can be remarkably versatile under different economic climates. 

Certain types of trusts like Grantor Retained Annuity Trusts (GRATs) or Charitable Lead Annuity Trusts (CLATs) become particularly advantageous in higher interest rate environments. These structures bank on a tactic known as “freezing” asset values for transfer purposes while still generating returns. 

This means that any growth exceeding the interest assumed by the IRS goes to your beneficiaries tax-free—a clever move when future-value predictions get hairy with rising rates. 

Maximize the Perks of Roth IRA Conversions

Not to be overlooked, converting a traditional IRA into a Roth IRA offers an intriguing play during times of higher interest rates. This technique pivots around paying taxes on retirement funds at today’s rates to avoid future taxation on earnings. Yes, it means some upfront cost, but the trade-off is nifty tax-free growth and withdrawals down the line.

“Converting to a Roth can significantly reduce estate size—and taxes—since taxes have been prepared. It ensures more of your wealth goes exactly where you intend. So, while initially, the payment might sting a little, this move sets up savings that resonate well beyond today’s financial landscape,” says Pennsylvania estate planning lawyer Tim Sechler.

Leverage Low-Interest Loans in Your Estate Strategy

Next up on the docket are intra-family loans, a somewhat underrated gem in estate planning, especially fitting when interest rates decide to soar. These are loans where you pay both bank and family members, lending money to relatives at rates lower than commercial banks but compliant with IRS minimums.

This is an effective way of shifting wealth to your loved ones without the gift tax implications, since it’s structured as a loan, not a flat-out gift. The best part is that if your family members invest that money wisely and achieve net returns higher than the interest they are paying you back, Both—you and them—stand to benefit. Plus, you get the principal back eventually (with interest). Are you ready for further tactical planning in your estate plan?