Continued Wealth Transfer Opportunities with July 2020 Interest Rates

The July 2020 Applicable Federal Rates (“AFR”) and the Internal Revenue Code Section 7520 rate continue at near historic lows. The July short-term AFR, which is used for loans with terms up to three years, will remain the same as the June rate: 0.18%. The July mid-term AFR, which is used for loans with terms greater than three years but no greater than nine years, will go up a few basis points from the June rate—to 0.45% from 0.43%–and the July long-term AFR, for loans with terms greater than nine years, will also go up from the June rate—to 1.17% from 1.01%. For each AFR, the rate is the same regardless of the compounding frequency, monthly, quarterly, semi-annually, or annually. The Section 7520 rate for July will be the same as the June rate—0.6%.

By way of comparison, in July 2019, both the short-term AFR and the midterm AFR were over 2%, and the long-term AFR was 2.5% for annual compounding and just under 2.5% for shorter compounding periods. The 7520 rate in July 2019 was 2.6%. Only six months ago, in January 2020, the short term AFR for annual compounding was 1.60%, the mid-term AFR was 1.69% for annual compounding, and the long-term AFR was over 2%. The 7520 rate in January 2020 was 2.0%.

The low AFRs and Section 7520 rate, in conjunction with depressed market values, both on Wall Street and Main Street, can be combined in a number of wealth transfer techniques from the simple to the complex to allow significant wealth to be transferred to younger generations. Some simple techniques include loans at low interest rates, either direct loans of cash or a financing which is a part of an installment sale of assets. In addition, loans previously made at higher interest rates can possibly be restructured with the current rates. Installment sales can be combined with valuation discounts in multi-step transactions of first transferring certain assets to family entities, followed by sales of equity in these entities, with the equity valued, as applicable, with discounts for lack of marketability and lack of control. The low Section 7520
rate and depressed asset values can make grantor retained annuity trusts (GRATs) particularly effective in transferring wealth, provided asset values eventually appreciate during the term of the GRAT. Charitable remainder trusts (CRTs) are also very effective, both for the transfer of wealth and in maximizing charitable income tax deductions, with a low Section 7520 rate (under particular rules that apply in valuing transfers to CRTs, the lowest of the Section 7520 rate during the month of transfer to the CRT or either of the two preceding months can be used to value the charitable remainder interest, so the July 2020 rate can be used for CRTs funded in August and September, even if the Section 7520 rate increases). CRTs may also be particularly appealing now with the temporary increase of the allowable charitable deduction amounts for individuals under the CARES Act.

Furthermore, there is the potential overriding change in gift and estate tax law in the near future—the possibility, perhaps probability, that the increased gift and estate tax exemptions enacted as part of the 2017 Tax Cuts and Jobs Act
(TCJA) will sunset sooner than scheduled under the TCJA (2026) as a result of the Fall election, both for budgetary and ideological reasons, if the administration changes and the Senate shifts to a Democratic majority. In addition, if there is Democratic control of both Congress and the White House, the IRS’s historic antipathy towards a number of effective wealth transfer planning techniques, including valuation discounts and long-term GRATs, may actually result in new legislation that restricts or even eliminates these and other planning techniques. In short, now may be one of the most tax efficient times to transfer wealth, because of the confluence of low interest rates, depressed asset values, and potential law changes because of the pending election.

Each wealth transfer technique that benefits from low AFRs or a low Section 7520 rate has its own nuances. Please contact the author, Eric Ciazza, Esq., or any of the other attorneys in the Estate Planning section of Selzer Gurvitch, if you would like to review wealth transfer planning techniques to provide for your loved ones and how they might apply to your particular circumstances.