December Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts
The December § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.6%, up from 2.4% in November. The December applicable federal rate (AFR) for use with a sale to a defective grantor trust, self-canceling installment note (SCIN) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded semiannually) is 2.10%, up from 1.99% in November.
Jerome Powell, the likely successor to Janet Yellen as head of the Federal Reserve, has expressed public support for the agency's current plan to continue interest rate hikes in the future. In light of the anticipated future increases, GRATs continue to offer valuable potential rewards on the transfer of assets that are expected to appreciate in the near-term.
The AFRs (based on semiannual compounding) used in connection with intra-family loans are 1.51% for loans with a term of 3 years or less, 2.10% for loans with a term between 3 and 9 years, and 2.62% for loans with a term of longer than 9 years.
Thus, for example, if parent makes a 9-year loan to child, and the child invests the borrowed funds and obtains a return in excess of 2.10%, the result is effectively a tax-free gift by the parent to the child in the amount of returns in excess of 2.10%. These same rates are used in connection with sales to defective grantor trusts.