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Interest rates for estate planning at all-time lows

May 15, 2020

The IRS recently released the June 2020 interest rates used for estate planning purposes. These rates are even lower than last month’s rates, which were already at all-time lows.

These low rates, combined with potentially-depressed asset prices and temporarily-high estate and gift tax exemptions (currently over $23 million for a married couple, but scheduled to sunset after 2025), make the economics of current estate planning transactions very attractive.

The IRS “7520” rate for June is 0.6% (down from 0.8% in May). This rate is at an all-time low. This 7520 rate is used as the “hurdle” rate for grantor-retained annuity trusts (GRATs) and charitable-lead trusts (CLATs and CLUTs), along with certain other estate planning vehicles. The effect of these low rates is that vehicles like GRATs and CLATs can be used to transfer significantly more assets to family members (or trusts for their benefit) free of estate and gift tax.

The IRS Mid-Term Applicable Federal Rate (AFR) for June is 0.43%, which is also an all-time low. This acts as the IRS minimum interest rate for promissory notes with up to nine-year terms for loans and sales to family members (or trusts for their benefit). By taking advantage of these ultra-low interest rates, sales of assets to family members or trusts can transfer more wealth to the next generations free of estate, gift, and generation-skipping transfer (GST) tax. The Long-Term AFR (for loan terms exceeding nine years) is also at an all-time low of 1.01%.

These June interest rates can be used for CLAT and family installment sale transactions that occur in June, July, or August of 2020, even if market interest rates rise from these low levels. For GRAT transactions and family loans of money (rather than installment sales of property), the June rate may only be used in the month of June.”

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