Senior Wealth Planner
Wealth Planner

In this Wealth Planning Update:

  • Wealth planning techniques linked to interest rates may still be an appropriate strategy in today's continued low-interest-rate environment.
  • The effectiveness of these techniques may be substantially altered in the near future if interest rates increase.
  • If you are considering transferring your assets, carefully evaluate the use of rate-linked strategies to help enhance the transition of your family's wealth.

Download the report (PDF)

In the midst of a very busy news cycle as of late, one key event was the Federal Reserve raising interest rates for the third time since 2008. The rate remained at 0.25 percent from December 2008 to December 2015 with more recent rate increases occurring in December 2016 and March 2017. As a result, you may think the window to take advantage of low rates has closed. Well, it has not closed, but it is being lowered. In addition to the rate increases that have already occurred, as of the time of this piece, two more are expected in 2017.

Despite the fact that interest rates have already started to rise, they are still relatively low compared to historic rates. But with these anticipated increases, time may be of the essence to take action in regard to planning opportunities designed to help transfer wealth efficiently to family members. With each increase, three popular wealth transfer techniques—grantor retained annuity trusts (GRATs), charitable lead trusts (CLTs), and loan-based options—may become less effective.

How do interest rates affect these estate planning techniques?

These wealth transfer techniques all share particularly high leverage in a low-interest-rate environment. Each month, the Internal Revenue Service (IRS) establishes a statutory rate that it believes is a reasonable investment or lending rate based on the current financial market environment. When interest rates are low, as they are now, investors have a low hurdle rate to overcome in order to transfer surplus wealth to their beneficiaries.

For example, under a GRAT, if the IRS believes, given current market conditions, you can earn only 2 percent on your investments and you earn 6 percent, the difference in returns could pass gift tax free to your beneficiaries. Additionally, these low interest rates may allow you to act as a lender and transfer wealth to your beneficiaries at a more efficient rate. A rise in interest rates, however, will increase the hurdle and intra-family lending rates, making GRATs, CLTs, and inter-family loans less advantageous.


A GRAT is a wealth transfer technique commonly used to shift a grantor's assets that are most likely to appreciate in value to a trust for a designated beneficiary. In exchange, the grantor gets the right to receive payments, on at least an annual basis, for a certain term of years. At the end of the term, any remaining assets in the GRAT pass to the beneficiaries outright or are held in continuing trust. If the grantor survives the term, the remaining trust principal is excluded from his or her estate for estate tax purposes and only the transfer tax "cost" should be the gift tax consequences of the initial funding (usually very low).

There are several ways to structure a GRAT to help enhance the potential transfer benefits to the beneficiary, but in all cases, the central idea is that the assets outperform the rate the IRS establishes (Section 7520 rate) to the greatest degree possible. GRATs are often structured for the shortest term (currently two years) to help achieve the lowest possible gift tax consequences. In August 2016, the 7520 rate was as low as 1.4 percent.

Using a hypothetical transfer of $1 million to a GRAT, growth of principal of 5 percent, and a two-year term, the cost of waiting could be as much as $40,339.

Comparison of GRAT 7520 Rates. Contact your Relationship Manager for more information.

Source: Wells Fargo Wealth Planning, IRS


A CLT is an irrevocable trust that initially pays a charitable beneficiary an annuity that is fixed at the start of the trust term (CLAT) or an amount that varies based on the trust's value each year known as a unitrust (CLUT) amount for a period of time. At the end of the trust term, any remaining assets pass to individual beneficiaries as named in the trust document. Like GRATs, a CLT is linked to the IRS Section 7520 rate. A donor transfers property either during life or upon death to the trust, creating an income interest in the property for a charitable organization's benefit for a period of years. At the end of the trust term, the remaining amount is transferred to a non-charitable beneficiary.

There are different types of CLTs that have different gift and income tax ramifications that are worth exploring with your advisor and wealth planner. A grantor lead trust can provide an immediate charitable income tax deduction when the trust is established, but the trust income is taxable for the donor each year. If the remainder interest is transferred to a family member, there may be gift tax ramifications. A non-grantor lead trust is the reverse—the trust pays the income tax, but there is no income tax deduction.

CLT Features:

  • CLTs have an accelerated deduction in the year of transfer.
  • Family members will have to wait a term of years before receiving the assets; however, the cost of gifting assets is lowered by the value of the annuity interest donated to charity.
  • When the time to transfer assets in the trust to the remainder beneficiaries arrives, any appreciation on the assets could pass gift- and estate-tax free.

Loan-based options

Low interest rate environments can also be advantageous for loan-based options where you lend money to your beneficiaries at below-commercial rates.

Intra-family loans

Typically, an intra-family loan involves a parent or grandparent lending money to a child or grandchild at the Applicable Federal Rates, which are lower than what commercial lenders charge.

The loan is often used to facilitate a large purchase, like a home, but may also be made to fund an investment or business opportunity. This can be beneficial when the borrower can invest the loaned funds and earn a higher rate of return than the interest being paid—the difference being basically a tax-free gift from the grandparent or parent to the child. This strategy also could provide some additional monetary benefits for the family, such as the interest paid on the loan remaining in the family and avoiding any additional loan costs associated with borrowing from, for example, a bank.

Let's review a quick example that highlights the potential economic benefit lost to a family as interest rates rise. The table below assumes a $1 million intra-family loan with a 2 percent interest rate rise using the Mid-term and Long-term Applicable Federal Rates as of February 17, 2017. It analyzes the additional interest the borrower would incur as rates increase.

Analysis of the additional interest a borrower would incur on a 9-year mid-term loan and a 30-year long-term loan as rates increase. Contact your Relationship Manager for more information.

Source: Wells Fargo Wealth Planning

As you can see, even a small rise in interest rates can have a dramatic effect on the amount that a child, as borrower, would owe a parent, as lender, of an intra-family loan over a 9-year or 30-year period. The cost of waiting in this example could be as much as $600,000.

Sale to an intentionally defective grantor trust

Another loan-based estate planning technique is a sale to an intentionally defective grantor trust (IDGT), also commonly referred to as an intentionally defective irrevocable trust (IDIT).

An IDGT is an irrevocable trust set up for the benefit of individual's heirs and—if the sale is structured properly—the grantor can transfer a significant portion of assets in a tax-efficient manner, thereby reducing the taxable estate. On its own, an IDGT can be a very powerful wealth-transfer technique. In many instances, the seller can discount the asset's sale price to below its fair market value.1 

An IDGT is treated differently for income tax and transfer tax purposes. For income tax purposes, this trust is a "grantor" trust, which means that the trust is not a separate income-tax-paying entity. The trust's income and deductions are taxable to the grantor, and sales (or other transactions) that occur between the grantor and the trust are not recognized or taxable.

However, for transfer tax purposes, the IDGT is a separate entity. While the initial transfer is taxable for gift, estate, or generation-skipping transfer tax purposes, when properly structured, the value of the trust is not included in the grantor's estate.


  • We are in a period of rising interest rates. This affects many wealth-transfer strategies that are the most effective in a low-interest-rate environment.
  • The cost of waiting is quantifiable and can make the argument that now is the time to consider many of these estate planning strategies.
  • Whether it is employing an investment strategy within a GRAT, creating a charitable legacy through a CLAT, or executing an asset sale to "freeze" your estate, we recommend making the time to have a conversation with your relationship manager about what's most appropriate for your individual circumstances.

1 Note that under the proposed Section 2704 regulations, the use of valuation discount is currently under review by the IRS to be eliminated.