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Take Advantage of Low Rates!

Published on: 13:55PM Nov 24, 2014

The IRS just released their applicable federal rates for December 2014. For loans less than 3 years, the rate is .34%; 3 to 9 years, it is 1.70%; and for over 9 years, it is 2.70%. These very low rates provide a very good opportunity to transfer additional wealth to your children or grandchildren without incurring any gift tax liability or eating into your lifetime exemption ($5.43 million for 2015). Let's look at an example:

Suppose you have an opportunity to invest in a new business venture or perhaps purchasing new farm ground. The cost of the investment is $1 million. You have two options, either buy it for cash outright, or have your children do the investment with you loaning them the funds. The investment should be able to pay you back in less than 9 years, so we structure it as a 9 year note with an interest rate of 1.70% (this can be interest only or fully amortized). The investment generates a 10% rate of return over the next 9 years. This results in $900,000 of income being generated. The amount of interest paid to you is $170,000 resulting in $730,000 of pre-tax wealth being generated by your children that will not need to be reflected on your estate tax return when you pass away. At today's 40% estate tax rate, that saves the family about $300,000 of estate taxes.

If you are concerned about your children's ability to manage the investment, you can always set up a LLE to hold the investment. You would own the voting units (1%) and your children would own the remaining non-voting units (99%).

Remember that an estate plan is not just one strategy. It involves several and in many cases, making certain changes during life (such as loaning funds to your children) during life will save a lot of estate taxes.