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Applicable Federal Rates

Cheap Money is Still Here but It’s Getting More Expensive

              I sure hope that everyone is looking at the recent rise in the mid and long-term Applicable Federal Rates (AFR).  After languishing at historically low levels since October, 2011, these benchmark rates have finally started a northern movement over the past few months.  Where they will stop, I wouldn’t hazard a guess but I know that the opportunities that these low rates represent, while still very favorable, more than likely won’t see recent levels any time soon.

I have been preaching the advocacy of Intra-family lending at the mid and long-term rates for years.  It may be better than gifting of assets to children and heirs.  Consider these points:

  • No gift tax returns to file or gift taxes to pay
  • An income stream albeit marginal (mid-term rate for August = 1.63% and long-term= 3.16%)
  • An element of control
  • An interim freeze on asset growth for loaned funds
  • Return of your money at some later date
  • Retention of any unused unified credit
  • Flexibility

While intra-family lending is a potent wealth transfer tool, rising AFR’s also affect many other planning tools.  One such program that I use extensively is the charitable lead unitrust, which employs the mid-term AFR to calculate the Section 7520 rates and charitable lead income tax deductions.

The planning opportunity afforded by these rates remains formidable.  If the client has the financial wherewithal, desire to transfer wealth efficiently and/or has charitable goals, there is no time better than now to explore the options created by low AFR rates.

 

Illustrations using techniques tied to the mid and long-term AFR are available upon request.