Recent Changes to Internal Revenue Service AFRs for Gifts and Estates

Applicable Federal Rates (“AFRs”) increases signal an upswing in federal taxation of estate and gift transfers to beneficiaries in the immediate future. Internal Revenue Service (“IRS”) AFR regulation mandates tax accountability of gifts and estates, as well as installment sales and intra-family loans. The latest AFR rate hike will make transfers of all kinds less attractive in the near term. Estate planning professionals recommend review of gift and estate-tax planning and portfolio management of interest-sensitive assets for changes in AFR assignment.

How will IRS applicable AFRs affect my estate?

Taxation of interest rates is a key element of the estate financial planning strategy. In accordance with the most recent federal IRS ruling, Applicable Federal Rates (“AFRs”)  will increase under IRC Code § 7520. Since January 2018, AFR rate trending has risen from 2.60% to 3.40% in July 2018.


The 7520 rate is used to determine gift and estate-tax value of annuities, an interest for a term, or for life, or a lifetime gift or testamentary transfer requiring reversionary or remainder interest applied to the month it is transferred. Charitable life estates incur AFRs two months prior to the actual transfer of a lifetime gift or testamentary estate transfer.


Prediction that wider application of a “blended annual rate” in determination of demand loan interest will coincide with those changes is at the forefront of the estate planning discussion. The blended rate approach allowable under IRC Code § 7872(e)(2)(A) applies to gifts and estate assets of a fixed principal amount.


The minimum acceptable interest rate, AFRs are a safe-harbor provision the IRS applies to intra-family loans. Loans made between family members are a popular alternative to asset distribution via gift or estate transfer to beneficiaries. The latter are generally subject to higher income tax application by the IRS.


AFR application varies according to timing of the loan, term of the loan, and interest compounding agreement. Estate planners calculate the 7520 rate at 120% the applicable mid-term rate with semi-annual interest compounding. The resulting rate is adjusted to the equivalent yield of annual compounding using a rounding convention of the nearest two-tenths of a percent.


How can estate planner help?

With changes in federal IRS laws for estate and gift transfers, it is important to know about current AFRs affecting key assets. Information about current AFRs and guidelines for tax reporting of estate assets can be obtained from an estate planner experienced in matters of New York State estate law.


Contact an Estate Law Attorney.

Find out about the recent changes to federal AFR application on gift and estate transfers by contacting an attorney specializing in estate planning. Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule a consultation about an estate planning or taxation matter.  

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