The Internal Revenue Service (IRS) publishes monthly the applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for the month following the month in which the Revenue Ruling is published in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the AFRs and 7520 rate for the following month provides a window of opportunity for the immediate or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. Effective implementation and management of interest-sensitive estate planning techniques involves numerous other factors in addition to the relevant AFR or the 7520 rate, including a client’s particular personal and financial circumstances, and should be undertaken only with the advice of competent tax counsel and financial advisors.The IRS has issued Revenue Ruling 2019-20, which provides the AFRs and 7520 rate for September 2019. Revenue Ruling 2019-20 appeared in Internal Revenue Bulletin 2019-36 dated Sept. 3, 2019. The downward trend that began in January 2019 continues, with all AFRs and the 7520 rate at or below 2.21% in September 2019.
What is the Applicable AFR? The applicable AFR is the minimum safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences — based on the month in which the loan is made, how frequently interest is compounded, and the length (term) of the loan.
AFRs Trending Down. AFRs have decreased across the board from August 2019 levels, making intra-family loans and installment sales to grantor trusts generally more attractive if made in September 2019.
September 2019 AFRs Summary. The AFRs for September 2019 are as follows:
Historical AFRs. The AFRs for September 2018 through September 2019 are as follows, in reverse chronological order:
Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.
What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs must be used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, either the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.
7520 Rate Remains at 2.2%. The 7520 rate remains at 2.2% for September 2019, making planning techniques like grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) more attractive than in months where the 7520 rate. Conversely, qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) have become less attractive, as they perform better in a higher interest-rate environment.
Historical 7520 Rates. The 7520 rates for September 2018 through September 2019 are as follows, in reverse chronological order: