In last month's newsletter, we emphasized the historic opportunities available for our clients as a result of low interest rates. Low interest rates offer clients the ability to transfer wealth without "giving away" assets, or by giving away less than expected. How is this possible?

The U.S. Treasury publishes monthly interest rate tables known as the Applicable Federal Rate (AFR). These tables establish a "floor" for the interest rate that may be charged between family members to avoid an imputed gift. The rates published for October are historic and attractive for those who may wish to transfer wealth or a family business to the next generation with minimal gift tax cost. The long term AFR for October is 2.95%, while the short-term AFR is a staggering .16%!!

What does this mean to you? Let's look at an example: Mary J. Client lends $1,000,000 to her Son, using a .16% fixed annual interest rate for a 30 month note, with principal due at the end of the term. The son purchases an investment yielding 2.5% annually. The difference between the interest payment due Mrs. Client and the interest received by Son through his investment is $23,400 to Son without a recorded gift!

Lower interest rates also assist in family business succession. Business owners looking to transition ownership to a descendant or other beneficiary should consider the use of owner-financed installment sales to an Irrevocable Grantor Trust. The same holds true for the owner of income-producing real estate or other investments. The following factors, which are all time sensitive, support these strategies:

  1. Historically low interest rates;
  2. Historically high gift tax credits available to "seed" the sale/loan; and
  3. In many cases, low valuations as a result of market conditions.

Many of our clients have seized this opportunity to transfer a business or income-producing asset tax-efficiently. We have seen the interest in these strategies grow with the enactment of the 2010 Tax Relief Act, and the continuing use of entities such as limited partnerships and LLCs. These entities offer control features for the senior generation in addition to valuation discounts in certain instances.

Please contact Randy Bond or Joe Vitek at 713-850-0700 for more information on these historic opportunities.

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510 Bering Dr., Suite 500
Houston, TX 77057-1457
713/850-0700 Fax: 713/850-8530