The May § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.6% (up slightly from the 1.4% rate in January, February, March and April). The applicable federal rate (“AFR”) for use with a sale to a defective grantor trust, self-canceling installment note (“SCIN”) or intra-family loan with a note of 9-year duration (the mid-term rate, compounded annually) is 1.30% (up slightly from the April rate of 1.15%). Remember that lower rates work best with GRATs, CLATs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans. The combination of a low § 7520 rate and a decline in the financial and real estate markets presents a potentially rewarding opportunity to fund GRATs in May with depressed assets you expect to perform better in the coming years.
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 0.28% for loans with a term of 3 years or less, 1.30% for loans with a term of 9 years or less and 2.89% 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 1.30%, the child will be able to keep any returns over 1.30%. These same rates are used in connection with sales to defective grantor trusts.