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Estate Planning Alert: Low interest rates plus low valuations create extraordinary planning opportunities

Interest rates are at historic lows.  Market values of many assets are lower than they were a few years ago.  This juxtaposition creates potentially significant wealth transfer opportunities.  A few strategies offer particular advantage.  Let’s first review why the juxtaposition works and then review the planning opportunities.

The interest rates for loans to family members and related party transactions are lower than they have been in several decades because they are set by the IRS each month based on U.S. Treasury rates.  These rates in turn set the valuation rate used to determine the value of property transferred in certain types of gift strategies. As a result, this rate is at an all time low of 1.4% (in November).  In the valuation process, this interest rate is the assumed rate for valuing the remainder interest that is the taxable gift component in some of the strategies discussed below.  This rate is often referred to as the “hurdle-rate” in terms of the rate of return required for the strategy to perform as well as the valuation projection for tax purposes.  While relative investment rates of return are low, the assumed rate is fixed at the time of the transfer, so when rates of return increase to more normal levels and market values increase as a result, the chance for success of these strategies should be greater than under normal circumstances.

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