IRS Interest Rates Drop to New All-Time Low

Posted on September 29, 2011 by Bryan Howard

One year ago, I wrote about interest rates reaching an all-time low. They dipped a little more late last year, then increased before heading lower again. Now, they have reached another all-time low.

The 7520 Rate for transactions in October of 2011 will be 1.4%. This represents a 30% decrease from the September rate of 2%.  

Grantor retained annuity trusts (“GRATS”) and charitable lead annuity trusts (“CLATS”) work well when the Section 7520 Rate is low. Installment sales to grantor trusts and intra-family loans also work well when interest rates are low. These transactions use different interest rates than the 7520 Rate, but these rates are also near the all-time low.

One of my clients is currently evaluating a sale to a grantor trust in exchange for a private annuity. Private annuities work better in a low interest rate environment. I seldom recommend private annuities because they work best in terms of reducing estate taxes when my client dies sooner. This particular client is not expected to live beyond 3 years, though he has at least a 50% chance of living at least one year. This 50% threshold is required in order to use the IRS actuarial tables.

The low interest rate environment is not good for charitable remainder annuity trusts (“CRATS”) and qualified personal residence trusts (“QPRTS”). Even though low interest rates are not favorable for QPRTS, some of my clients are establishing QPRTs to take advantage of the current low values of residential real estate. One of my clients will be establishing two QPRTs for her Florida vacation home before the end of September in order to take advantage of the higher rates.

You should consider acting now to take advantage of the opportunities presented by the record low IRS interest rates and the $5 million federal gift tax exemption that is in effect for 2011 and 2012. 

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IRS Interest Rates Drop to All-Time Low

Posted on September 20, 2010 by Bryan Howard

Certain estate planning transactions are sensitive to interest rates that are established each month by the IRS. The interest rates, in turn, are based on market interest rates for debt obligations issued by the U.S. Government.

One rate that is used for several estate planning transactions is known as the Section 7520 Rate. The 7520 Rate for transactions in October of 2010 will be 2%. This ties the all time low (February, 2009) in the 21 year history of the 7520 Rate.

October will be a fantastic month for transactions that work well when the Section 7520 Rate is low. These transactions include grantor retained annuity trusts (“GRATS”), charitable lead annuity trusts (“CLATS”), installment sales to grantor trusts, and intra-family loans. Installment sales and loans use different interest rates than the 7520 Rate, but these rates are also near the all-time low.  If you already have an intrafamily loan, you should consider refinancing the loan in October.

The low interest rate environment is not good for charitable remainder annuity trusts (“CRATS”) and qualified personal residence trusts (“QPRTS”). Even though low interest rates are not favorable for QPRTS, some of my clients are establishing QPRTs to take advantage of the current low values of residential real estate.

Higher estate taxes are on the way in January and you should consider acting now to take advantage of the opportunities presented by the record low IRS interest rates.

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Tax Court Approves 17% Discount for Fractional Gifts of Vacation Home

Posted on May 13, 2010 by Bryan Howard

Qualified Personal Residence Trusts significantly reduce estate taxes that will be assessed on a personal residence. For married couples, I often recommend that the husband and wife each transfer a 50% interest in the residence to separate QPRTs. When both spouses establish separate trusts, you hedge the mortality risk associated with QPRTs. The other benefit from separate QPRTs was demonstrated by the recent Ludwick case in which the husband and wife each transferred 50% of their $7 million Hawaiian home to a separate QPRT. The court ruled that the value of each 50% interest was 17% less than 50% of the value of the entire home. The 17% fractional interest discount significantly reduced the gift tax cost of establishing the QPRTs.

There is also a way to take advantage of fractional interest QPRTs when it is not possible or practical to establish separate husband and wife QPRTs. One person can establish two separate QPRTs with different terms, for example, 6 years and 8 years, and transfer a 50% interest to the two separate QPRTs.

My clients seldom establish QPRTs for their Tennessee residences because they do not want to pay Tennessee gift taxes. Therefore, most QPRTs that my clients establish are for vacation homes located in other states. Generally, QPRTS in other states do not generate any federal or state gift taxes.

If you are buying an expensive home in Tennessee or elsewhere, there is a technique called a joint purchase trust that can be used without any gift taxes having to be paid. Joint purchase trusts have a lot in common with QPRTs. However, they must be established prior to purchasing the home.

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