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AFRs Dipping — A Signal to Look at Your Gifting Plans

07.25.16 | T&E Chat

AFRs (applicable federal rates) are interest rates published each month by the IRS. They are the lowest rates you can charge when making intra-family loans. Because they are taking a substantial dip in August (see chart), now may be a good time to accelerate any gifting you are planning.

AFR August July % Change
Short-Term 0.56% 0.71% 22.5%
Mid-Term 1.18% 1.43% 18.9%
Long-Term 1.90% 2.18% 14.7%
Section 7520 1.40% 1.80% 22.2%

These rates are the lowest for the year and, in the case of the Section 7520 “Hurdle Rate”, the lowest since 2013.  While is it not clear that rates will trend even lower due to uncertainty over Brexit, families should seriously consider the opportunity to pursue tax efficient wealth transfer strategies.  In this environment, the following techniques are advantageous:

Intra-Family Loans. Parents can make low-interest loans to children or to trusts for the benefit of children or other family members, who may pay interest annually and the loan principal at the end of the term. Since the AFR rates are still lower on average than the commercial lending rates, these loans are useful for providing investment capital and funding home purchases.

Grantor Retained Annuity Trust (GRAT). The grantor transfers assets to a trust for a term of years and receives an annual annuity. GRATS are typically structured so that virtually no taxable gift is incurred at creation. If the grantor survives the term, the assets pass to the beneficiaries virtually estate and gift tax free. The annual annuity the grantor receives is based on the 7520 rate. The lower the 7520 rate, the less the grantor is required to receive. This means the more the trust earns and appreciates, the more that passes to the beneficiaries.

Additional planning opportunities that are attractive in a low interest rate environment include sales to Intentionally Defective Grantor Trusts and Charitable Lead Trusts.

Should you have questions about how to plan and structure your gifting and overall estate planning to achieve the maximum tax benefits, contact me at SDitman@berdonllp.com or your Berdon advisor.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.