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Low Interest Rates Provide Opportunity for Gifting

The low interest rate environment provides an opportunity to transfer assets to children and other beneficiaries at little or no gift-tax cost. Although there are several strategies for gifting, two of the most effective transfer techniques involve the use of inter-family loans and/or establishing Grantor Retained Annuity Trusts (GRATs). Both techniques work well in a low interest rate environment and allow for the transfer of assets between generations. The applicable federal rate for a nine-year inter-family loan can be as low as 2.87% (based on the April 2008 midterm rate). If the borrower can earn interest in excess of 2.87%, the growth passes to the beneficiary/borrower gift-tax-free.

The GRAT works in a similar manner, except the assets transferred to the GRAT are still taxable to the donor. The GRAT creates an annuity payable to the donor, which is calculated based on the discount rate of 3.4% effective April 2008 (generally the present value of the annuity equals the value of the assets transferred to the GRAT). Growth exceeding 3.4% passes to the beneficiaries free of gift tax. The rate is 3.4% for April 2008, which is down from 4.4% in January 2008.

For more information on this topic, please contact Brian Carter at 312-980-2994, Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.