Articles & News

Historically Low Interest Rates Provide Great Opportunity for Gift Planning and Estate Reduction Techniques

When transactions (either gifts or sales) between family members, or trusts for the benefit of family members, are entered into the government requires a minimum interest rate to avoid treating the interest component of the transaction as a gift (often called a “below market loan”). The required minimum interest rate to avoid this treatment is known as the Applicable Federal Rate (often called the “AFR”). The current AFR for August, 2020 (which comes into effect on August 1, 2020) is at historical all-time lows. The August AFR for short-term transactions (3 years or less) is 0.17%, the AFR for mid-term transactions (over 3 years but not more than 9 years) is 0.41% and the AFR for long-term transactions (greater than 9 years) is 1.12%. These historically low rates present great opportunities for wealth transfer and estate reduction techniques by taking advantage of any of the following planning options (to name a few): (a) entering into part-gift/part-sale transactions for the benefit of family members with closely-held business interests (either with an entity already in existence or the creation of a new one), (b) a simple loan of funds to a family member or trust for his or her benefit, or (c) the creation of more complex estate planning vehicles such as Grantor Retained Annuity Trusts (GRATs) or Charitable Lead Annuity Trusts (CLTs).

These historically low interest rates in conjunction with the most advantageous gift and estate tax regime since the inception of the estate tax system (for tax year 2020 the combined federal gift and estate tax exemption is $11.58 million per person – an all-time high), provides a unique opportunity to plan for your family’s future while reducing the possibility/amount of future estate taxes.

New Applicable Federal Rates are published monthly by the IRS. So, to take advantage of the historically low rates before they begin to rise, please contact us at 847-562-1400 to discuss the planning strategies that best fit with your goals and asset-makeup.

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