Estate and Gift Planning with Low Interest Rates – Making the Best of a Bad Situation
Interest sensitive planning is dependent ton the applicable federal rate and the section 7520 rate. Below are the relevant Internal Revenue Code sections and Treasury rulings concerting the applicable federal rates:
- Section 1274(d)(1)(A) provides that the applicable federal rate is:
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In the case of a debt instrument with a term of: |
The Applicable Federal Rate is: |
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Not over 3 years |
The Federal short term rate |
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Over 3 years but not over 9 years |
The Federal mid-term rate |
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Over 9 years |
The Federal long-term rate |
2. Section 7520(a) provides the general rule that the value of any annuity, any interest for life or a term of years, or any remainder or reversionary interest shall be determined—
(1) under tables prescribed by the Secretary, and
(2) by using an interest rate (rounded to the nearest 2/10 ths of 1 percent) equal to 120 percent of the Federal midterm rate in effect under section 1274(d)(1)f or the month in which the valuation date falls.
3. Section 7872 provides rules for treatment of loans with below market interest rates, and provides that in the case of a term loan, a below market loan is any loan if the amount loaned exceeds the present vale of all payments due under the loan,
– the present value of any payment is determined as of the date of the loan by using a discount rate equal to the applicable federal rate, and
– the applicable federal rate in the case of a term loan shall be the applicable Federal rate in effect under section 1274(d) as of the date on which the loan was made, compounded semiannually.
- Revenue Rulings: The applicable federal rates and the section 7520 rate are published monthly by the IRS in a revenue ruling, issued approximately 2 weeks prior to the end of the previous month for which the rate is being published. The AFR’s are published under Table 1, and the section 7520 rate is published under Table 5.
The August 2020 rates, published in Rev. Rul. 2020-15, 2019-32 I.R.B. __ (Aug. 3, 2020), are:
Short-term AFR: 0.17%
Mid-Term AFR: 0.41%
Long-Term AFR: 1.12%
Section 7520 rate: 0.4%
See Christopher T. Rogers, Estate and Gift Planning with Low Interest Rates – Making the Best of a Bad Situation, Mitchell Williams Law, August 10, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.