The Section 7520 rate for January 2010 will decrease from 3.2% to 3.0%. A decrease in the Section 7520 rate benefits Defective Grantor Trusts, Intra-family Loans, GRATs, Charitable Lead Trusts and SCINS. Conversely, a decrease in the Section 7520 rate adversely impacts QPRTs and Charitable Remainder Trusts. The 7520 rate has been hovering near 3.0% since June 2009, which is very low compared to historic averages.
If an income, estate, or gift tax charitable contribution is allowable for any part of the property transferred, you can elect to use the 7520 rate for the current month or either of the two months preceding the month in which the valuation date falls. The Section 7520 rate for October (can only be elected if completed this month) was 3.2%, and the rates for August and September were also 3.2%. Remember, the use of a preceding month's Section 7520 rate requires an affirmative election that must be included.
Defective Grantor Trusts and Intra-Family Loans - Beneficial - Use January’s Rate
Lower rates are beneficial for defective grantor trusts and intra-family loans. Thus, if you are contemplating either a defective grantor trust or an intra-family loan, consider deferring the transaction to next month to take advantage of lower rates. However, please note that there is proposed legislation that would be detrimental to this technique, and you may instead want to complete the transaction as soon as possible and/or before the end of the year.
Note that a sale to a Defective Grantor Trust is able to use the Applicable Federal Rate (AFR) as described in Section 1274. The Section 7520 rate is determined by taking 120% of the mid-term AFR. Therefore, the Section 7520 rate, which is required to be used for GRATs, will always be higher than the AFR allowed to be used for a Defective Grantor Trust. While this results in an extra benefit by using a Defective Grantor Trust, all other advantages and disadvantages in comparing the use of a GRAT or Defective Grantor Trust should also be considered.
Next month's AFR amounts are as follows: Short term rates (applicable to instruments with terms of 3 years or less) were 0.69% in December and are 0.57% for January – a .12% decrease. Mid-term instruments (over 3, but not over 9 years) were 2.64% in December and are 2.45% for January – a .19% decrease. Long-term instruments (over 9 years) were 4.17% in December and are 4.11% for January – a .06% decrease.
Grantor Retained Annuity Trusts – GRATs - Beneficial - Use January's Rate
Lower rates are beneficial for GRATs. Thus, if you have pending GRAT transaction, you may wish to defer that transaction to next month. However, considering the potential detrimental legislation, you should consider completing the transaction as soon as possible and/or before the end of the year. A term certain GRAT generally can be zeroed out. The recently released US Government's fiscal year 2010 budget proposals include requiring a minimum 10-year term for GRATs, which would significantly reduce the possible benefits and applicability of this technique.
Qualified Personal Residence Trusts – QPRTs - Detrimental - Use December’s Rate
Lower rates are detrimental for QPRTs. If you have a pending QPRT transaction, you may want to accelerate the transaction so it is completed this month. If you include a reversion feature, a reduced gift will result as the client gets older; so waiting has the added benefit if the client is considered one year older to his or her nearest birthday. The benefit of waiting to receive the reduced gift should be weighed against the adverse impact from the lower rates. Also, since there is proposed legislation that would be detrimental to this technique, you may instead want to complete the transaction as soon as possible. It is important to note that unlike a technique involving in part an income, gift or estate charitable deduction, you cannot elect to use the Section 7520 rate in effect for either of the previous two months.
Private Annuities - Proposed Regs Eliminate Most Benefits of Use – Don’t Use
Lower rates are beneficial for private annuities. However, on October 17, 2006, the IRS issued proposed regulations that would eliminate (retroactive generally to 10/17/06) the tax benefits of using a private annuity to sell appreciated property between family members. Under the proposed regs, gain on the sale of property in exchange for a private annuity no longer could be deferred and recognized as the annuity payments are received. Instead, the amount realized on the date of the transaction is deemed to be the fair market value of the annuity (as determined under the appropriate interest rate under Section 7520). Thus, the entire gain will be recognized at the time of the exchange, regardless of the taxpayer's method of accounting. The IRS has not acted on the Proposed Regulations as of December 22, 2009; however, a change in position in Final Regulations is not expected.
Charitable Remainder Annuity Trusts – CRATs – Detrimental – Elect to Use December's Rate
Lower rates are detrimental to charitable remainder annuity trusts. Section 7520 permits the use of either the current or either of the two months preceding the month in which the valuation date falls if an income, estate or gift tax charitable contribution is allowable for any part of the property transferred. If you have a pending CRAT transaction, you could elect to use the December rate of 3.2% to get the benefits of the highest rate available now, or you could wait until the March rate is announced on or about February 19, 2010 to see if the February or March rate increases (not recommended). Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CRAT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will increase the tax benefits of the transaction. The benefits of waiting until the attainment of another year of age should be weighed against the adverse impact of the lower rates.
Charitable Remainder Unitrusts – CRUTs – Detrimental – Elect to Use December’s Rate
Lower rates are detrimental to charitable remainder unitrusts. However, the impact of changes in the section 7520 rate is less pronounced than in the case of a CRAT. Section 7520 permits the use of either the current or either of the two months preceding the month in which the valuation date falls if an income, estate or gift tax charitable contribution is allowable for any part of the property transferred. If you have a pending CRUT transaction, you could elect to use the December rate of 3.2% to get the benefits of the highest rate available now, or you could wait until the March rate is announced on or about February 19, 2010 to see if the February or March rate increases (not recommended). Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CRUT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will increase the tax benefits of the transaction. The benefits of waiting until the attainment of another year of age should be weighed against the adverse impact of the lower rates.
Charitable Lead Annuity Trusts – CLATs - Beneficial - Use January's Rate
Lower rate are beneficial for charitable lead annuity trusts. If you have a pending CLAT transaction, you should wait and see if the February rate (announced on or about January 19, 2010) will decrease. Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! However, if the CLAT is based on the life or lives of the grantor(s), allowing one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will reduce the tax benefits of the transaction. The benefits of the lower rate must be weighed against the reduction of benefits resulting if the grantor adds another year of age next month.
Charitable Lead Unitrusts – CLUTs - Beneficial - Use January’s Rate
Lower rates are beneficial for charitable lead annuity trusts. However, the impact of changes in the section 7520 rate is less pronounced than in the case of a CLAT. If you have a pending CLUT transaction, you should wait and see if the February rate (announced on or about January 19, 2010) will decrease. Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CLUT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will reduce the tax benefits of the transaction. The benefits of the lower rate must be weighed against the reduction of benefits resulting if the grantor adds another year of age next month.
Self-Canceling Installment Notes (SCINs) - Beneficial - Use October's Rate
Self-canceling installment notes warrant additional consideration in light of the elimination of the benefits of using private annuities to defer gain on the sale of property between family members. Lower rates are beneficial for SCINs; thus SCIN transaction should be deferred to next month. However, adding a year to the age of a measuring life will generally decrease the tax benefits of the transactions assuming actual life expectancy is unchanged (i.e., the individual on whose life the SCIN is based lives to the same date). SCINs pose some significant issues, most importantly, the triggering of all unrecognized gain (and where that gain is triggered) upon death. Carefully up front planning can increase the likelihood that you ultimately will enjoy the tax benefits that are anticipated at the outset of the transaction.
The Section 7520 rate for January 2010 will decrease from 3.2% to 3.0%. A decrease in the Section 7520 rate benefits Defective Grantor Trusts, Intra-family Loans, GRATs, Charitable Lead Trusts and SCINS. Conversely, a decrease in the Section 7520 rate adversely impacts QPRTs and Charitable Remainder Trusts. The 7520 rate has been hovering near 3.0% since June 2009, which is very low compared to historic averages.
If an income, estate, or gift tax charitable contribution is allowable for any part of the property transferred, you can elect to use the 7520 rate for the current month or either of the two months preceding the month in which the valuation date falls. The Section 7520 rate for October (can only be elected if completed this month) was 3.2%, and the rates for August and September were also 3.2%. Remember, the use of a preceding month's Section 7520 rate requires an affirmative election that must be included.
Defective Grantor Trusts and Intra-Family Loans - Beneficial - Use January’s Rate
Lower rates are beneficial for defective grantor trusts and intra-family loans. Thus, if you are contemplating either a defective grantor trust or an intra-family loan, consider deferring the transaction to next month to take advantage of lower rates. However, please note that there is proposed legislation that would be detrimental to this technique, and you may instead want to complete the transaction as soon as possible and/or before the end of the year.
Note that a sale to a Defective Grantor Trust is able to use the Applicable Federal Rate (AFR) as described in Section 1274. The Section 7520 rate is determined by taking 120% of the mid-term AFR. Therefore, the Section 7520 rate, which is required to be used for GRATs, will always be higher than the AFR allowed to be used for a Defective Grantor Trust. While this results in an extra benefit by using a Defective Grantor Trust, all other advantages and disadvantages in comparing the use of a GRAT or Defective Grantor Trust should also be considered.
Next month's AFR amounts are as follows: Short term rates (applicable to instruments with terms of 3 years or less) were 0.69% in December and are 0.57% for January – a .12% decrease. Mid-term instruments (over 3, but not over 9 years) were 2.64% in December and are 2.45% for January – a .19% decrease. Long-term instruments (over 9 years) were 4.17% in December and are 4.11% for January – a .06% decrease.
Grantor Retained Annuity Trusts – GRATs - Beneficial - Use January's Rate
Lower rates are beneficial for GRATs. Thus, if you have pending GRAT transaction, you may wish to defer that transaction to next month. However, considering the potential detrimental legislation, you should consider completing the transaction as soon as possible and/or before the end of the year. A term certain GRAT generally can be zeroed out. The recently released US Government's fiscal year 2010 budget proposals include requiring a minimum 10-year term for GRATs, which would significantly reduce the possible benefits and applicability of this technique.
Qualified Personal Residence Trusts – QPRTs - Detrimental - Use December’s Rate
Lower rates are detrimental for QPRTs. If you have a pending QPRT transaction, you may want to accelerate the transaction so it is completed this month. If you include a reversion feature, a reduced gift will result as the client gets older; so waiting has the added benefit if the client is considered one year older to his or her nearest birthday. The benefit of waiting to receive the reduced gift should be weighed against the adverse impact from the lower rates. Also, since there is proposed legislation that would be detrimental to this technique, you may instead want to complete the transaction as soon as possible. It is important to note that unlike a technique involving in part an income, gift or estate charitable deduction, you cannot elect to use the Section 7520 rate in effect for either of the previous two months.
Private Annuities - Proposed Regs Eliminate Most Benefits of Use – Don’t Use
Lower rates are beneficial for private annuities. However, on October 17, 2006, the IRS issued proposed regulations that would eliminate (retroactive generally to 10/17/06) the tax benefits of using a private annuity to sell appreciated property between family members. Under the proposed regs, gain on the sale of property in exchange for a private annuity no longer could be deferred and recognized as the annuity payments are received. Instead, the amount realized on the date of the transaction is deemed to be the fair market value of the annuity (as determined under the appropriate interest rate under Section 7520). Thus, the entire gain will be recognized at the time of the exchange, regardless of the taxpayer's method of accounting. The IRS has not acted on the Proposed Regulations as of December 22, 2009; however, a change in position in Final Regulations is not expected.
Charitable Remainder Annuity Trusts – CRATs – Detrimental – Elect to Use December's Rate
Lower rates are detrimental to charitable remainder annuity trusts. Section 7520 permits the use of either the current or either of the two months preceding the month in which the valuation date falls if an income, estate or gift tax charitable contribution is allowable for any part of the property transferred. If you have a pending CRAT transaction, you could elect to use the December rate of 3.2% to get the benefits of the highest rate available now, or you could wait until the March rate is announced on or about February 19, 2010 to see if the February or March rate increases (not recommended). Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CRAT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will increase the tax benefits of the transaction. The benefits of waiting until the attainment of another year of age should be weighed against the adverse impact of the lower rates.
Charitable Remainder Unitrusts – CRUTs – Detrimental – Elect to Use December’s Rate
Lower rates are detrimental to charitable remainder unitrusts. However, the impact of changes in the section 7520 rate is less pronounced than in the case of a CRAT. Section 7520 permits the use of either the current or either of the two months preceding the month in which the valuation date falls if an income, estate or gift tax charitable contribution is allowable for any part of the property transferred. If you have a pending CRUT transaction, you could elect to use the December rate of 3.2% to get the benefits of the highest rate available now, or you could wait until the March rate is announced on or about February 19, 2010 to see if the February or March rate increases (not recommended). Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CRUT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will increase the tax benefits of the transaction. The benefits of waiting until the attainment of another year of age should be weighed against the adverse impact of the lower rates.
Charitable Lead Annuity Trusts – CLATs - Beneficial - Use January's Rate
Lower rate are beneficial for charitable lead annuity trusts. If you have a pending CLAT transaction, you should wait and see if the February rate (announced on or about January 19, 2010) will decrease. Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! However, if the CLAT is based on the life or lives of the grantor(s), allowing one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will reduce the tax benefits of the transaction. The benefits of the lower rate must be weighed against the reduction of benefits resulting if the grantor adds another year of age next month.
Charitable Lead Unitrusts – CLUTs - Beneficial - Use January’s Rate
Lower rates are beneficial for charitable lead annuity trusts. However, the impact of changes in the section 7520 rate is less pronounced than in the case of a CLAT. If you have a pending CLUT transaction, you should wait and see if the February rate (announced on or about January 19, 2010) will decrease. Note that the trust must be set up and funded by the end of December if you want to take the charitable deduction in 2009! If the CLUT is based on the life or lives of the grantor(s), allowing the one or more of the grantors to add an additional year to their age (measured to the nearest birthday), will reduce the tax benefits of the transaction. The benefits of the lower rate must be weighed against the reduction of benefits resulting if the grantor adds another year of age next month.
Self-Canceling Installment Notes (SCINs) - Beneficial - Use October's Rate
Self-canceling installment notes warrant additional consideration in light of the elimination of the benefits of using private annuities to defer gain on the sale of property between family members. Lower rates are beneficial for SCINs; thus SCIN transaction should be deferred to next month. However, adding a year to the age of a measuring life will generally decrease the tax benefits of the transactions assuming actual life expectancy is unchanged (i.e., the individual on whose life the SCIN is based lives to the same date). SCINs pose some significant issues, most importantly, the triggering of all unrecognized gain (and where that gain is triggered) upon death. Carefully up front planning can increase the likelihood that you ultimately will enjoy the tax benefits that are anticipated at the outset of the transaction.