The Applicable Federal Rate (AFR) – What
Works in a Changing Environment?
In 1988, TAMRA created a
means to measure the time value of money for gift and estate planning
functions. Prior to 1971, the government
used 3.5% as an assumed rate, but changed to a rate that floats with debt
instruments, and this rate changes monthly.
Essentially, the IRS tries to determine what a stream of income or a
deferred gift is worth and adjusts the value over time. For lifetime gifts, periodically updated
mortality tables provide a mechanism for estimating the “time” portion of the
“time value”, but what’s needed in a present
value/future value calculation is a way to assign a market interest rate. As a result, §7520 requires that the applicable
rate be based on federal securities with maturities between three and nine
years. Most estate and gift calculations
use the interest rate in the month of the transfer, but for charitable gifts,
there is an exception for donors who may elect to use either the current
month’s rate or one from the previous two months. The most recent* §7520 charitable midterm
rate (120%) used in charitable planning calculations is the lowest rate seen in
years, and may create serious problems for donors contemplating a CRAT or CGA. Because some charitable gifts produce a
remainder value for donors or heirs, and others produce an income value, the
changing rates provide a seesaw effect; as the rates go up, some transfers are
more attractive and others less so.
What tools and tactics work better when Section 7520
rates are down?
Private
Annuities, Grantor Retained Annuity Trusts (GRAT), Charitable Lead Annuity
Trusts (CLAT), and Charitable Gifts of a Remainder Interest in a farm or
residence. Self Canceling Installment Notes (SCIN),
What tactics are more restricted when Section 7520
rates are depressed?
Grantor
Retained Income Trusts (GRIT), Personal Residence Trusts and Qualified Personal
Residence Trusts (PRT, QPRT), Charitable Remainder Annuity Trusts (CRAT may
fail either the 10% remainder test or the Rev. Rul.
77-374 exhaustion test), Charitable Gift Annuities (CGA although the deduction
goes down, the amount of principal attributed in the annuity payments goes up,
if the annuity does not pass the 90% test, the charity offering the CGA may
have a UBTI problem), Life Estates.
Which tools are generally unaffected by AFR changes?
Grantor Retained Unitrusts (GRUT), Charitable Remainder Unitrusts
(CRUT), Charitable Lead Unitrusts (CLUT)
* Revenue Ruling 2003-71
indicates the July rate is 3.0%. Rates
for June and May were 3.6% and 3.8%, respectively.
|
CMFR |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
|
10.00 |
10.00 |
11.22 |
11.58 |
11.68 |
11.26 |
10.54 |
10.01 |
9.68 |
10.10 |
10.07 |
9.70 |
|
|
1990 |
9.57 |
9.70 |
10.27 |
10.54 |
10.61 |
10.97 |
10.53 |
10.44 |
10.28 |
10.63 |
10.59 |
10.25 |
|
1991 |
9.78 |
9.64 |
9.41 |
9.50 |
9.62 |
9.53 |
9.66 |
9.87 |
9.59 |
9.08 |
8.69 |
8.51 |
|
1992 |
8.10 |
7.64 |
8.06 |
8.43 |
8.56 |
8.47 |
8.25 |
7.82 |
7.19 |
6.96 |
6.83 |
7.40 |
|
1993 |
7.63 |
7.50 |
7.08 |
6.56 |
6.57 |
6.41 |
6.67 |
6.40 |
6.44 |
6.02 |
5.91 |
6.10 |
|
1994 |
6.40 |
6.42 |
6.45 |
7.08 |
7.74 |
8.33 |
8.22 |
8.49 |
8.49 |
8.56 |
8.97 |
9.33 |
|
1995 |
9.54 |
9.59 |
9.34 |
8.84 |
8.58 |
8.22 |
7.56 |
7.27 |
7.68 |
7.59 |
7.35 |
7.12 |
|
1996 |
6.89 |
6.75 |
6.56 |
7.08 |
7.65 |
7.93 |
8.12 |
8.24 |
7.99 |
8.09 |
7.94 |
7.59 |
|
1997 |
7.34 |
7.68 |
7.72 |
7.82 |
8.25 |
8.19 |
8.00 |
7.69 |
7.51 |
7.63 |
7.34 |
7.25 |
|
1998 |
7.13 |
6.84 |
6.72 |
6.85 |
6.84 |
6.95 |
6.83 |
6.70 |
6.67 |
6.16 |
5.42 |
5.43 |
|
1999 |
5.59 |
5.67 |
5.80 |
6.35 |
6.28 |
6.46 |