Historically Low Interest Rates Provide Unique Opportunities

As of October 1, 2010, the IRS has substantially reduced the already low interest rates that govern certain gifting and family loan techniques. 

What does this mean to you? For a limited time, these historically low interest rates will provide opportunities for lifetime gifting techniques of all kinds, including grantor retained annuity trusts (GRATs), sales to family trusts and intrafamily loans. 

These gifting techniques may provide transfer tax savings to the extent that gifted, sold or loaned assets appreciate in excess of certain applicable interest rates. 

GRATs.   For GRATs funded in October, the applicable interest rate, known as the Section 7520 rate, will be 2.0 percent.  This rate is at an historic low.  To put this opportunity into historic context, note that this rate in June 1997 was 8.2 percent.  With this interest rate reduction, if assets transferred to a GRAT funded in October appreciate at a rate in excess of 2.0 percent, any additional appreciation will pass transfer tax free to the transferor’s beneficiaries. 

Loans.  For loans implemented during October, the applicable interest rates will depend on the loan term.  For short term loans (3 years or less), the rate will be 0.41 percent.  For mid-term loans (more than 3 years but not more than 9 years), the rate will be 1.79 percent.  For long term loans (more than nine years) the rate will be 3.29 percent.  Again, if assets that are transferred to the transferor’s family (or a trust for them) in exchange for a note appreciate in excess of these interest rates, the excess appreciation will pass to the family transfer tax free.

Limited time frame.  These rates are reset monthly and may increase significantly on November 1, 2010.  In addition, certain proposed tax legislation, if passed, would limit the efficacy of certain gifting techniques in the near future.