Trusts can be an important part of financial and estate planning for many people in North Carolina, and the decision about what type of trust to create can be influenced by changing interest rates. Interest rates are on the rise after 10 years of low rates, which means that some types of trusts could be useful now in different ways than in the recent past. For people choosing other types of trusts, they may want to act quickly to make a decision, given that rising interest rates could lead to a less advantageous tax situation for the future.
Two popular types of trusts are grantor retained annuity trusts, or GRATs, and charitable lead annuity trusts, known as CLATs. Both of these types of trusts function in similar ways. Each trust pays out an annuity for a fixed period of years; after that time, the value of the trust passes to the beneficiaries named by the trust creator. The beneficiaries are taxed according to a formula based on the interest rate at the time of the creation of the trust, despite the impact of actual rates over time. Therefore, creating these types of trusts during a lower interest-rate period can be beneficial.
In the case of GRATs, the annuity is paid each year to the grantor of the trust, while in the case of CLATs, it is paid to a charity of the creator’s choice. CLATs are often selected as an option not only because they can support philanthropic interests but also because they enable significant tax deductions for charitable giving.
There are other types of trusts that can also be considered as they can provide financial benefits in a climate of high interest rates. An estate planning attorney may work with people to create the right types of trusts to protect their assets and support their loved ones.