As the Fed Twists, Seize Opportunity to Transfer Wealth

Daniel B. Eagan

It remains to be seen whether the Federal Reserve can stimulate the economy with its latest “twist” strategy for lowering interest rates, but today’s ultralow rates create one clear opportunity: if you have personal wealth that you intend to leave to family or charity, now is the best time in decades to initiate certain wealth-transfer strategies.

Strategies that benefit from low interest rates include certain charitable trusts, intra-family loans, installment sales and long-term grantor-retained annuity trusts, all of which enjoy favorable tax treatment in the US. Here’s a simple example of one: the charitable lead annuity trust, or CLAT. By wrapping your charitable donations into a CLAT, you can leverage the charitable gifting that you already do and generate an estate-tax benefit. Alternatively, you could also double your charitable gifting while still increasing the expected legacy for your children or other heirs.

In its most basic form, a CLAT is an irrevocable trust into which you put liquid assets. The trust pays a specified amount to charity each year for a specified term (for example, $100,000 per year for 20 years). If the trust has any assets remaining at the end of its term, these transfer to a beneficiary—such as your heirs—without transfer taxes.

The key to a CLAT’s success is that the assets must grow at a faster rate than the payout to charity—otherwise, there will be no assets left at the end of its term. And to keep the strategy from being too easy, the IRS sets a minimum acceptable rate each month.

However, the IRS “hurdle rate” is tied to Treasury bond rates—so October’s rate for a CLAT is only 1.4%!Hurdle Rate for CLATs Drop
That means that if you create a 20-year CLAT in October of this year, the trust’s assets need only to grow at an annualized rate greater than 1.4% over 20 years for the remainder to go to your heirs, free of transfer taxes. While there are no guarantees in life, we project a better than 98% chance of success today. Under normal market conditions, CLATs are a 50/50 proposition, our research suggests.

Of course, you should consult with professional tax- and estate-planning advisors when considering CLATs or any trust structures. Your financial advisor should also advise you on how to ensure that the CLAT suits your long-term financial objectives.

The views expressed herein do not constitute and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation. 

Daniel B. Eagan is Head of the Wealth Management Group at Bernstein Global Wealth Management, a unit of AllianceBernstein.

One comment

  1. Very informative. As a personal investor, I was unaware CLATs, much less the strategies involved.

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