Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered
These published rates are referred to as Applicable Federal Rates and “depend on the length of the term of a promissory note, the number of times interest is paid each year (i.e., monthly, quarterly, or annually) and the interest paid by the U.S. Treasury on its obligations. Also, the IRS publishes a rate under Section 7520 of the Internal Revenue Code. This rate is used for actuarial calculations. “The 7520 Rate equals 120% of the federal mid-term rate rounded to the nearest two-tenths of a percent.”
Due to Covid-19, banks have lowered interest and rates and bond yields have reduced dramatically, drawing close to historic lows. These reductions affect the Applicable Federal Rates and the 7520 rate.
“For instance, the annual rate for November 2020 (compounded annually) applied to short-term obligations (1-3 years) is 0.13%, the mid-term rate (4-9 years) is 0.39% and the long-term rate (over nine years) is 1.17%. The 7520 Rate which is used to make actuarial calculations for several estate planning techniques is 0.4% for November transactions.”
The use of the lower interest rate results in a lower cash flow return to the lender, meaning more cash growth in the trust.
Grantor Retained Annuity/Unitrust Trusts and Charitable Lead Trusts all benefit from these low-interest rates. However, other trusts like, Qualified Personal Residence Trusts, do not share the same positive relationship with low-interest rates.
Unfortunately, the low-interest rates will not last forever, so no is a great time to consider taking advantage of the low rates and implementing estate planning strategies that will allow you to do so.
See Christopher R. Gray, Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered, The National Law Review, November 2, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.