For many in Texas, trusts have an important role to play as part of an overall estate plan that can best represent the interests and desires of the person who created the trust. Not only do trusts allow for precision and ease in passing assets to beneficiaries after a person has passed away, but they can also provide greater financial and tax benefits than other options. However, as interest rates change, the decisions people make about trusts can also change.
Some people may opt for a grantor retained annuity trust, known as a GRAT, or a charitable lead annuity trust, which is referred to as a CLAT. Both of these trusts function in similar ways. In each case, an annuity is paid out each year from the value of the trust created for a fixed period of time. In the case of a GRAT, the annuity is paid to the creator of the trust as a source of income; in the case of a CLAT, the annuity is paid to a charity, enabling the grantor to receive tax deductions for charitable donations.
After that term of years is over, the balance of the trust passes to the beneficiaries designated by the trust's creator. The calculation of potential gift taxes owed by the beneficiaries is based on the interest rate at the time the trust was created no matter the rates that later impacted the trust's investment. Therefore, creating the trust at a time of lower interest rates can be helpful to beneficiaries in lowering their potential tax burden.
There are other types of trusts to consider that are more useful in a high interest rate climate, including qualified personal residence trusts. An estate planning attorney may work with people planning for the future to create trusts that benefit themselves as well as their heirs.