The September applicable federal rate (“AFR”) for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.4%. That is lower than the August rate of 2.6% which, until then, had been the lowest rate so far this year. 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) is also down, to 1.94%. 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 AFR and the bear market environment presents a potentially rewarding opportunity to fund GRATs in September with depressed assets that you expect to perform better in the coming years. However, legislation currently remains pending in Congress that would significantly curtail short-term and zeroed-out GRATs. Therefore, GRATs should be funded immediately in order to be grandfathered from the effective date of any new legislation that may be enacted.
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 .46% for loans with a term of 3 years or less, 1.94% for loans with a term of 9 years or less and 3.66% 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 1.94%, the child will be able to keep any returns over 1.94%. These same rates are used in connection with sales to defective grantor trusts.