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If you are setting up a trust, the key interest rate is the 7520 rate. The Internal Revenue Service recalculates the 7520 rate each month and it’s based in the recent auctions of three-to nine-year U.S. Treasury notes. You can view a table by going to 7520


When it comes to setting up a trust, the current interest rate is something to consider. Some popular trusts are detailed below.


1. Qualified Personal Residence Trusts (QPRT’s)


The best aspect of this type of trust is that it freezes your home at its current value and allows you to transfer any future appreciation to your heirs free of gift and estate taxes. For this type of trust, the higher interest rates are when you set it up the better since it minimizes the value of the gift you make to your heirs. This will reduce the amount of gift tax you’ll pay.


When a QPRT is set up; you remain the home’s owner for as long the trust is in effect. This is usually about ten years. When the trust expires, the home passes to your children.


For an example of how this works, suppose you are 65 years old and your property is worth $500,000. When you put your house into a QPRT, the value of the gift to your heirs is based on the home’s $500,000 value. However, the home won’t actually transfer to your children until the trust expires. The law allows you to discount the $500,000 you’re transferring to your children by a current interest rate (The 7520 rate). This will give you the current value of the gift you’ll be making in the future.

If you’re interested in setting up a QPRT, you may want to wait for interest rates to go higher. However, you have to be careful because if you do not outlive this trust, the full market value of your home will be included in your estate.


2. Grantor Retained Income Trusts (GRIT’s)


This type of trust also benefits from higher interest rates. It is beneficial for those individuals who want to leave money to more distant relatives (such as nieces, nephews, cousins, etc). It is also used by unmarried couples who want to be sure each other is provided for.


For the most part, these trusts are funded from securities. During the term of the trust, any interest and dividends earned must be paid out to the person who sets it up. People tend to fund this trust with securities that pay very little income. The reason for this is that the more you keep inside the trust, the more you will have for your heirs. As long as you are still alive when the trust expires, the money will go to your beneficiaries without passing through your estate.


Just as the QPRT, you’ll have to pay gift tax on the portion of what you put into these trusts that supposed to go to your heirs. As the 7520 rate rises, the discounted value of that gift falls reducing the tax bill you’ll pay- (There is a $1million gift trust exclusion). There is no set term for these. If you are young, you may want to let one run for a while-say, 20 years. That will save on gift taxes because the trust’s current value will be discounted over more years.


3. Charitable Remainder Annuity Trusts (CRAT’s)


If you have a big block of stock that you bought years ago at a fraction of today’s price and you want to diversify that holding, but you don’t want to trigger a huge capital-gains tax bill, the CRAT may be a good choice for you (That is, as long as you also want to leave some money to a charity).


If you put the stock into a CRAT, you no longer own it. Because the trust benefits a charity, it is a tax exempt entity and it can sell the stock without paying taxes. The charity can then reinvest the proceeds in a diverse portfolio.


You retain a lot of the benefits from the investments. These trusts are required to distribute a fixed amount –at least 5% of their initial value- to you each year for as long as you live. Then, at your death, what’s left goes to charity.


When you set up a CRAT, you’re entitled to make a tax deduction on the portion that goes to charity. As interest rates rise, the assumption is that the trust’s earnings will, also. Because the amount you get is fixed at the beginning, the IRS assumes there will be more money left for the charity- so your charitable deduction today will be based on a higher amount.


4. Grantor Retained Annuity Trusts (GRAT’s)


The GRAT’s fare best when interest rates are low. However, if you expect an asset that you own to appreciate significantly, it’s probably worth setting one up today. For example, if you have a large amount of company stock, you may want to put it into a GRAT. To avoid triggering a gift tax bill, the person who sets up the trust must agree to take back the entire amount of the stock plus interest calculated at today’s 7520 rate (4.2% as of 7/08) over the entire life of the trust.


What’s the point of this? If the GRAT appreciates by 10% a year, the owner will take back the first 4.2%. However, the heirs will receive the rest or 5.8 percentage points each year, tax free. Also, because the owner takes back everything he gave, there is no gift tax.


If rates rise, the payoff declines. If you think interest rates are headed up, set up a long term GRAT to lock in today’s 4.2% interest rate.



If you are interested in setting up a trust, contact a financial planner such as, Oakland Lewis, at 1-877-380-9139.