Smart strategies for a low-interest-rate environment

Smart strategies for a low-interest-rate environment

Interest rates can play a role in how people invest.

But interest rates can also influence borrowing. Chris Hennessey explains how certain planning strategies become more attractive in a low-interest-rate environment.

One of these strategies is a family loan. The loan must be formally structured, including a promissory note and terms. The interest rate applied must conform with the Applicable Federal Rate (AFR), set monthly by the Internal Revenue Service. In the video, Chris offers two strategies of how families may utilize family loans. One involves loaning to other family members who then invest the proceeds. To the extent the market return on the amount invested exceeds the interest rate, this represents wealth transferred to another family member without gift tax implications.

Another example involves establishing a family loan for other family members to finance the purchase of a residence. With this arrangement, children can receive a below-market rate loan based on prevailing mortgage rates and the current long-term AFR. The interest paid on the loan qualifies as a tax deduction, and parents report the income on the interest they receive.

Other strategies
In a low-rate environment, the rates tied to a Grantor Retained Annuity Trust are also low. Again, as long as the funds are invested and return more than the prevailing interest rate threshold, the difference stays in the trust and is transferred to the beneficiaries. This accomplishes wealth transfer without using any of the parents’ annual or lifetime gift tax exemption.

Transitioning a family business can also be cost effective when interest rates are low. Using an installment sale strategy, where the business is transitioned by a series of payments made over a period of time using loan notes, would be considered a low-interest loan. The cost of financing that installment sale would be low in the current environment.

Investors considering any of these wealth transfer strategies may want to take advantage of them while interest rates are still low.


More in: Estate and Wealth Transfer