Trusts that have become unpopular with the increasing rates

It is important to keep up with the changing times. For instance, even though low interest rates have been the norm for the past decade, the fact that rates have been increasing lately means that estate planners need to adjust their strategies accordingly. A client living in Louisiana might be advised to use a different type of trust today than they would have been a year ago.

There are several types of trusts that are falling out of favor in the coming high interest rate climate. A case in point is the grantor retained annuity trust, GRAT for short, which thrives when interest rates are low but doesn’t do well when the rates go up. GRATs pay their grantors an annuity whose size is inversely proportional to the Section 7520 rate, a rate that is calculated from the Federal Midterm rate at the time of creating the trust. Therefore, a lower Section 7520 rate translates to a higher annuity. Additionally, the lower the rates are, the lower the tax liability of the trust’s beneficiaries is.