One potentially offsetting advantage from the current low returns on fixed-income investments is the ability to make relatively large tax-free transfers to one's beneficiaries.  The Wall Street Journal column by Jason Zweig, "Transferring Wealth Via the Bank of Mom & Dad," gives examples of techniques that might be attractive for parents wanting to help their children by serving as a source for low-interest financing. 

Mr. Zweig's example of an October loan at 2.63% to a child needing to borrow money is obviously appealing.  And with an even lower November rate, the parents' loan of $1,000,000, for example, to their child and his or her spouse would permit the forgiveness of (a) interest after the first year and, in on top of that, (b) more than $26,000 of principal each year, without exceeding the annual gift tax exclusions.  The article points out where to go for the minimum interest rates that can safely be charged for loans of differing maturities, as well as those made in ensuing months.

Reference is also made to more esoteric planning approaches, whose effectiveness is enhanced by the current low interest rate environment.  We have discussed GRATs in previous Farella Family Wealth Group Updates, which, if the right investment vehicle is available and performs as anticipated, can result in significant gift and estate tax savings.  The other techniques mentioned, including the self-canceling installment note and intentionally defective grantor trust, may indeed offer a greater tax advantage than that of the low-rate loan technique headlining the article.  However, bear in mind that they are more complicated to implement and require the right factual situations for their use. 

If you would like to discuss any of the issues raised in this Farella Family Wealth Update, or any other estate planning concerns, please contact your Farella Family Wealth attorney at 415-954-4400 or 707-967-4000.

This information is provided as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.