Planning ideas with potential higher rates on the horizon

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 02/02/22


Inflation is top of mind for many investors as the rate of price increases has reached levels not seen in decades.

In addition, with a strengthening labor market and economic recovery, the Federal Reserve has begun tapering its asset purchases. Last week, the central bank announced it expects to begin raising short-term rates soon.

Higher interest rates impact numerous planning actions. With the prospect of higher rates this year, here are some strategies for investors to consider now.

Interest-rate related strategies to consider

Refinance mortgage before rates potentially jump
  • 30-year fixed mortgage rates have increased over the past year, rising almost a full percentage point since January 2021
  • However, current rates (around 3.7% for fixed 30-year mortgage as of 1/28/22) are still lower than pre-pandemic levels. As recent as November of 2018, the 30-year rate approached 5.0%
  • Homeowners may want to consider refinancing at current levels given the threat of higher interest rates on the horizon
  • There can be significant benefits for homeowners to reduce the term of their mortgage. For example, consider moving from a 30-year term to a 15-year term and secure a significantly lower interest rate. Currently, the average spread between 30-year and 15-year fixed mortgage rates is almost 1%.
  • Even a small jump in rates will impact fixed mortgage payments over the long term

Does it make sense to review your current mortgage?

30-year fixed rate and 15-year fixed rate over five years

Source: Federal Reserve Economic Data, St. Louis Federal Reserve 2022, average weekly mortgage rates.

Strategies to transfer wealth to the next generation (before interest rates rise)
  • Lower interest rates are more advantageous for certain wealth transfer strategies – such as grantor retained annuity trusts (GRATs), installment sales, intra-family loans, and certain charitable trusts. All of these strategies involve calculations based on prevailing interest rates
  • As interest rates increase, these strategies become less attractive on a relative basis
  • Those looking to transfer wealth may want to explore these strategies in light of the risk of rising interest rates in the future
Intra-family loans or installment sale of a family business. These strategies can be effective in transferring wealth from one generation to the next. At lower required IRS interest rates, financing a family loan or a series of installment payments is less expensive.

Grantor retained annuity trust (GRAT). Allows the grantor to transfer wealth within a trust in exchange for an annuity payment for a fixed number of years. Over the trust term, growth in assets within the trust, in excess of the required interest rate for the annuity payments (IRS Section 7520 rate), are effectively transferred to beneficiaries free of federal gift and estate tax.

Charitable lead trust (CLT). To the extent interest rates are low (IRS Section 7520 rate) and assets inside the trust appreciate, the remainder interest left to beneficiaries after the trust term will be higher.

IRS 7520 rates trending up

IRS 7520 rate trending up over five years

Source: IRS, 2022.

Seek advice when considering timely strategies

It may be important to take advantage of some of these strategies now while interest rates are still relatively low. Overall interest rates have increased since the pandemic and are forecasted to rise as the Fed tightens monetary policy. It’s important to consult with a financial professional or tax expert before taking advantage of strategies that will impact tax and estate plans.

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