How changing interest rates can impact your estate planning strategy

Investors have several strategies available to ensure they leave as much of their wealth as intended to loved ones or charities. But in a changing interest rate environment, some tools can be more effective than others in helping these investors and their beneficiaries manage high taxes (income and estate). Here is what makes each option unique, and why some may make more sense in a world of high interest rates.

Estate planning allows you to prepare for what will happen to your wealth and assets. High net worth investors often have a complicated balance sheet that includes real estate, stocks, bonds, life insurance, and valuable items. With estate planning, not only can you influence who gets what, but you can also distribute your assets in a way that may reduce the potential tax burden for the recipients. In addition, you can potentially use estate planning to help reduce your current tax burden, allowing you to enjoy more of your wealth.

A split-interest trust is a type of trust that can benefit both charitable and non-charitable beneficiaries and may provide significant tax advantages for the creator of the trust. Because many high-net-worth investors want to leave money both to loved ones and their favorite charitable causes, a split trust may be used as the vehicle to reflect their intended wishes.

But not all spit-interest trusts work the same. In different interest rate environments, estate planning strategies that have been successful in the past may no longer provide the same benefit, while others may be more favorable. While you should always consult a lawyer when it comes to estate planning, here is a very simplified explanation of how the techniques/trusts might work:

• Charitable Lead Annuity Trusts (CLATs): A CLAT lets you transfer assets into an irrevocable trust, which then pays your chosen charities an annuity over a defined period. Once the annuity term ends, the remaining amount is then paid out to your designated non-charitable beneficiaries.
• Charitable Remainder Unitrusts (CRUTs): A CRUT lets you transfer assets into an irrevocable trust and then make fixed payments back to yourself or other non-charitable beneficiaries. At the end of the term, all remaining assets in the CRUT pass to your chosen charity.

As you can see, each trust type differs primarily in who benefits and in what order they receive the benefit. However, their unique structures also mean that their overall efficacy can wax and wane depending on the interest rate environment.

In general, a lower interest rate environment makes CLATs more favorable, while a higher interest rate makes CRUTs more favorable.

Because interest rates have risen significantly and are expected to remain relatively high going forward, establishing a CRUT may be a consideration.

Choosing the right tool isn’t something you should do on your own. Work with your attorney, tax advisor, financial advisor, or start with your E*TRADE relationship manager to get advice on choosing, creating, and funding a trust that meets your goals and wishes.

Source: Topics in Wealth Strategies: Trust Tax and Estate Strategies in a Rising Rate Environment, Sarah D. McDaniel, CFA, Managing Director, Morgan Stanley Wealth Management. January 2023.

CRC# 3650769 07/2024