The August applicable federal rate (“AFR”) for use with estate planning techniques such as CRTs, CLTs, QPRTs, and GRATs is 1.0%. The rate for use with a sale to a defective grantor trust, self-cancelling installment note (“SCIN”) or intra-family loan with a note of a 9-year duration (the mid-term rate, compounded annually) has declined, to 0.88%. Remember that lower rates work best with GRATs, CLTs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans. The low AFR presents great estate planning opportunities to move assets to lower generations with little cost.
Clients also should continue to consider “refinancing” existing intra-family loans. The AFRs (based on annual compounding) used in connection with intra-family loans are 0.25% for loans with a term of 3 years or less, 0.88% for loans with a term of 9 years or less and 2.23% for loans with a term of longer than 9 years.
Thus, for example, if a 9-year loan is made to a child and the child can invest the funds and obtain a return in excess of 0.88%, the child will be entitled to retain any returns over 0.88%. These same rates are used in connection with sales to defective grantor trusts.