The U.S. economy is officially in a recession that may last for years on account of the shutdowns caused by the coronavirus pandemic. Businesses shuttered either temporarily or permanently, and people lost their jobs, and the Federal Reserve has lowered the interest rates to a range of 0% to 0.25%.
While low interest rates signal bad news ahead, they are a silver lining in the crisis for people looking to create an estate plan or modify their existing estate planning strategies.
Learning how low interest rates will affect your estate plan will help you determine whether or not it is now the time to take action.
Why interest rates are so low
When the economy is in trouble, the Federal Reserve puts low interest rates into place to stimulate it again. "It's one of their favorite methods to encourage people to theoretically spend rather than save on big and small purchases alike," says Ty Stewart, CEO and president of Simple Life Insure.
There's no knowing how long low interest rates will last, so it's best to look into your estate planning strategies now.
Here are some ways in which you can use these low interest rates to your advantage.
You will pay less taxes
Utilizing low interest rates is one of the estate strategies to reduce estate taxes.
According to Stewart, wealth transfers can be taxed. The actual amount taxed on things like estate gifts is calculated using several valuables—two of them are appreciation and interest rates. If you transfer wealth to family members during a recession, the gifts' value will stagnate or depreciate, and interest rates are lower, which means gift and estate tax penalties will decrease.
"This combination makes economic downswings the time to lock in estate plans and even start passing along assets and wealth because they will be taxed less," says Stewart.
Refinancing is possible
Your home is one of the assets that you'll incorporate into your estate plan. However, you want to make sure it's all paid off before it's passed down.
If you have a mortgage, you can refinance it for a lower rate and pay it off faster if you have the money, says Ian Kelly, VP of Operations at NuLeaf Naturals.
According to Brian DeChesare, founder of Mergers & Inquisitions, "If you're leaving real estate property to anyone, you want to minimize their long-term expenses. Even if their intent is to sell the property, lower interest rates can mean a lower monthly payment in the meantime."
It's easier to acquire more real estate
Low interest rates mean you can get a loan with more attractive and affordable terms. If you're looking to add more assets to your estate plan, you can purchase a property and get a mortgage with low interest rates.
"This is an outstanding time to buy commercial real estate as part of a long-term estate plan," says Karly Iacono, First Vice President, Net Leased Properties Group at Marcus & Millichap. "There is a significant spread between interest rates and cap rates, or the unleveraged return on income-producing property, that can yield very attractive overall returns with no management or involvement in the property."
Modifying or creating your estate plan
Having an estate plan is important, no matter what stage of life you're in. According to DeChesare, it can protect your heirs from the Internal Revenue Service, eliminate or minimize what they have to pay towards inheritance, state and federal taxes, lower their income taxes and help avoid family conflicts.
"You don't want family members fighting over what they believe they're entitled to," he says. "An estate plan clarifies who inherits what. Without one, people often end up in court, which is both time-consuming and costly."
During this negative economic downturn, turn lower interest rates into a positive when it comes to your estate planning, and ensure you and your family will be protected now and in the future.
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