A savvy business owner is always looking at economic conditions for opportunities to profit and further secure their company’s and family’s future. While every business and situation differs, the current low interest rate environment offers some intriguing possibilities:
Borrow from the company: Assuming your company is in good financial shape, think about borrowing from it. If you borrow from your company, it’s considered a private loan. The applicable federal rate (AFR), published by the IRS, is the minimum interest rate allowed for such loans. (This rate also applies to loans between family members.)
At the time of this writing, applicable federal rate for short-term loans (up to three years) is less than 0.2 percent. For mid-term loans (from three to nine years), the rate is less than 1 percent, and for long-term loans (more than 9 years), the rate is less than 2 percent. Who wouldn’t be happy with terms like these?
Similarly, you could personally lend a child or other family member money at the AFR, and he or she could invest it in something earning a much higher rate of return. An added benefit of this arrangement is that it gets cash out of your estate while incurring very low interest costs for the child or other relative.
Remember that you must properly document these types of loans and charge at least the AFR to avoid IRS scrutiny.
Consolidate for refinancing: Now is a good time to look at real estate, major projects, expansions, and renovations. Yes, material costs are high right now, and material supply chains are clogged. But with interest rates so low, refinancing could be a wise move and deliver increased cash flow and flexibility.
Also, consider buying what you’re now leasing. Unlike residential real estate, the cost of office space has remained stable. With so many people working from home, it’s likely that an office space glut will remain, and there may be bargains in your area. (Note that industrial and commercial space has not followed this pattern. In fact, it’s become more expensive as companies are onshoring more due to pandemic-related supply chain disruptions.)
Work on your estate plan: Preserving your wealth for your family is always worthy of attention, but some estate planning options are especially attractive when interest rates are low.
For example, a charitable lead trust (CLT) is a gift of cash or other property to an irrevocable trust. A named charity receives the income stream from the trust for a defined number of years. In the meantime, depending on how the trust is structured, the donor gets a current income, gift, or estate tax deduction on the donated assets. Once the income stream period ends, the remaining assets are distributed to non-charitable beneficiaries, such as family members.
This type of trust works well in a low interest rate environment because IRC Section 7520 rates are prescribed as the rates used to value the charitable lead and remainder interests. The lower the federal rate, the higher the income or gift tax deduction.
Some donors create CLTs in conjunction with a donor-advised fund named as the lead beneficiary. This arrangement enables the donor to strategize and influence the nature of the charitable giving during his or her life and after death.
Make Your Money Work
Whether you’re refinancing, taking out a loan, or estate planning, it’s important to position your assets for the best possible return. There are a variety of ways to take advantage of low interest rates that complement an existing business plan. Taking the initiative now — and consulting with a qualified advisor — can ensure you aren’t kicking yourself down the road once interest rates inevitably rise.
The more thoughtful your tax and financial planning, the better positioned you’ll be to maximize business opportunities when they arise. Dembo Jones advisors can help you evaluate your options and provide the flexibility to thrive in any business environment. Contact us today.