Don’t let uncertainty hold you back from pursuing planning opportunities in today’s economy.
While interest rates are rising and other economic indicators seem to keep changing, understanding potential impacts on your overall financial outlook can be critical. Now is the time to consider how federal interest rates may impact your planning opportunities — and what planning approaches may be viable for your situation.
Key interest rate indicators to consider
Factors such as economic growth, inflation, and employment levels help determine federal policies that impact interest rates. Each month, the Internal Revenue Service (IRS) reports various prescribed rates called Applicable Federal Rates (AFRs) for federal income tax purposes. Here are two AFRs to keep in mind as you plan for immediate and future needs:
Short-term AFRs typically are adjusted when policy rates change or when economic growth accelerates. Rising short-term rates can have a meaningful effect on the economy because they raise the cost of borrowing, which has the potential to impact your short-term or long-term goals.
Long-term AFRs change based on macroeconomic factors, inflation expectations, and supply/demand dynamics, which can make them more volatile or more difficult to forecast than short-term rates. Rising long-term rates have a more significant effect on fixed-income investors because they affect bond prices.
5 planning steps you can take today
Here is a checklist to help you uncover planning opportunities in a rising rate environment:
Clarify your short- and long-term objectives. Are you aiming to prepare for retirement? Manage your debt? Establish a college savings plan? Think through what is important to you during this time, and what life changes have recently occurred that may have impacted your objectives.
Organize and review your documentation. Now is a great time to review documentation associated with your estate plan, including wills and trusts, beneficiary designations, and insurance policies. It may have been longer than you realize since you last checked these documents. Being proactive can help you avoid potential hurdles, expenses, or headaches.
Weigh your options with your advisors. Review your plan components against your updated needs to see if anything necessitates a change. Has your risk tolerance changed? What about your cash flow needs for short and long term? You’ll want to work together to help ensure that your plans align with your time horizons and financial goals.
Evaluate wealth transfer strategies with your advisors. Right now, the Tax Cuts and Jobs Act (TCJA) is expected to sunset at the end of 2025; at that point, estate/gift exclusion and generation-skipping transfer (GST) exemption amounts will be subject to a cut. In addition, some strategies may provide tax advantages when interest rates are high. Discuss whether tactics such as Qualified Personal Residence Trusts (QPRTs) and Charitable Remainder Trusts (CRTs) may make sense for your needs.
Consider potential impacts on your business. Consider proactive transition planning with your tax and legal advisors in the next year, especially if higher interest rates and a general economic slowdown will negatively affect the value of your closely held business.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are filed.
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.