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Consider Revitalizing Your Wealth Plan

Much as a hurricane disrupts more than a community’s topography, changing interest rates affect more than current borrowing costs. Volatile financial markets, like swift weather systems, may cause short term losses while setting up for potential economic rejuvenation. High net worth families should prepare to weather investment impacts, as well as consider how higher interest rates may require refreshing the techniques relied upon to meet other financial objectives.

Morgan Stanley’s Family Office Resources group points out “some of the most common interest rates, adjusted monthly and used by the IRS to make certain calculations, have been lower than 1% and as high as 9.8%”.1 A range that wide can cause meaningful changes in outcomes. As such, now is a good time for a deep dive and review of income tax and estate planning strategies. Especially given the end of a period of historically low rates and a move to what could be a “higher for longer” rate cycle.2

The impact can be demonstrated by comparing two commonly used charitable gift strategies: lead annuity and remainder annuity trusts. These are considered split interest trusts because they divide an investment into two parts: the ending value of the asset that funds the trust and a cash flow periodically distributed from the trust.

  1. Lower interest rate environments make CLATs more
    favorable, while
  2. Higher interest rate environments make CRATs more

Through a CLAT a donor irrevocably transfers proper- ty to a trust for a term of years, makes a gift of an annuity interest (cash flow) in the trust property to a charity and makes a gift of the trust remainder to a beneficiary (typi- cally themselves or younger relatives). Both gifts are valued using an IRS benchmark discount rate. The amount of the beneficiaries’ taxable gift is the market value of the prop- erty transferred to the trust less the value of the retained annuity. The amount of the charitable gift, and the corre- sponding deduction, is the value of the retained annuity.1

• The transaction can be structured so that the present value of the annuity gifted to the charity equals the market value of the property transferred to the trust (zeroing out the CLAT).1

• A lower interest rate decreases the value of the annuity being paid to charity and increases the value of the gift of the remainder.1

• Transfer tax savings are achieved where the property transferred to a CLAT appreciates at a rate greater than the IRS discount rate used in valuing the income and remain- der interests. A lower discount rate means a lower hurdle for transfer tax savings.1

• Example: Donor, 60, transfers property worth $5 million to a CLAT giving a $568,346 annuity to charity for a 10-year term when the IRS discount rate is 2.4% (zeroing out the CLAT).1

  • If the assets grow at 6% per year, at the end of the 10- year term, $1,462,990 would pass to the remainder beneficiaries free of additional gift/estate tax.1
  • ‒  Alternatively, if the IRS discount rate were 1.2% at the time of the transfer, a $533,590 annuity would “zero out” the CLAT and $1,921,094 would pass to the remainder beneficiaries if the assets grew at the same 6%.1

Through a CRAT a donor irrevocably transfers property to a trust, retains an annuity interest (cash flow) in the trust measured by a life (or lives) or a term of up to 20 years, and makes a tax-deductible gift of the trust remainder to charity. The trust itself is tax-exempt but distributions from the trust are taxable.1

• A lower interest rate produces a smaller income tax charitable deduction (and increases the value of the annu- ity).1

• Example: Donor, 60, transfers $1 million to a CRAT and retains a $60,000 annuity for a 10-year term when the IRS discount rate is 5.8%. The donor funds the trust with a low basis concentrated stock position that doesn’t pay dividends. The trust sells the stock without capital gains tax and reinvests in tax exempt municipal bonds, thereby limiting the taxable income to the donor on annual dis- tributions. The donor makes a charitable gift of $554,182.5

‒ If the discount rate declined to 3.4%, the charitable gift decreases to $498,478.5

These examples demonstrate that wealth planning requires ongoing management to maintain relevance through evolving life events, personal preferences and eco- nomic factors. Knowing your options and impacts across a lifetime of economic seasons could provide rejuvenating benefits to sow the seeds of growth for generations.


1 The Impact of Interest Rate Changes on Estate Planning (CRC 3893632 12/2021)

2 Lisa Shalett – The GIC Weekly: An Inflation Boomerang?

3 Topics in Wealth Strategies: Trust Tax & Estate Strategies in a Rising Rate Environment (CRC 4337771 03/2022)

4 Income and Estate Tax Planning Toolkit (CRC 3893593 02/2022)

5 Family Office Resources Group: Wealth Planning Illustration – CRAT

(CRC 3378632 01/2021)



Private Wealth Advisor Kathleen Youngerman has engaged Mind Body Soul Magazine to feature this content .

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax
or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.

This material has been prepared for informational purposes only and is subject to change at any time without further notice. Information contained herein is based on data from multiple sources and Morgan Stanley Smith Barney LLC (“Morgan Stanley”) makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice. The appropriateness of a particular investment or strategy

will depend on an investor’s individual circumstances and objectives. Be aware that the particular legal, accounting and tax restrictions, margin requirements, commissions and transaction costs applicable to any given client may affect the consequences described.

This presentation was designed to illustrate the financial impact of a particular planning decision. The slides herein do not constitute a recommendation.

Caution: many estate techniques share the common risk of the loss of control of the assets once the gift of the assets is complete.

These slides address federal tax issues only; states may have different tax exemption amounts and statutes that impact the analyses.

Past performance is not necessarily indicative of future performance. We are not offering to buy or sell any financial instrument or inviting you to participate in any trading strategy.

Morgan Stanley Smith Barney LLC does not accept appointments nor will it act as a trustee but it will provide access to trust services through an appropriate third party corporate trustee.

Rates will vary over time, particularly for long term investments. Hypothetical results are for illustrative purposes only and are not intended to represent future performance of any particular investment. Your actual results may differ. The principal value and investment return of an investment will fluctuate with changes in market conditions, may be worth more or less then original cost. Taxes may be due upon withdrawal.

The term “Family Office Resources” is being used as a term of art and not to imply that Morgan Stanley and/or its employees are acting as a family office pursuant to Investment Advisers Act of 1940.

Morgan Stanley Private Wealth Management, a division of Morgan Stanley Smith Barney LLC. Member SIPC.


Kathleen Youngerman, Private Wealth Advisor

The Harmony Family Office at Morgan Stanley Private Wealth Management

314 889 4862 / Valerie.L.Warren@morganstanleypwm.com / advisor.morganstanley.com/the-harmony-family-office

14805 N Outer Forty Rd / Ste 200 / Chesterfield, MO 63017


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