IRS Rule Changes to AFRs for Gifts and Estates

Each year tax reforms provide estates and beneficiaries the chance to benefit from rate incentives. Review the latest in tax reform to find out if trustees and beneficiaries stand to benefit from steady or lower than expected Applicable Federal Rates (“AFRs”). The December 2021, federal Internal Revenue Service (“IRS”) published AFRs index reported a 1.45% Long-term tax-exempt rate for ownership changes. IRS reported AFRs signal changes to tax rate regulation. The slight upturn of rates follows recent AFR rate decreases, which made estate and gift transfers more attractive in the near term. Estate planning professionals recommend review of gift and estate-tax treatment requirements, to capitalize on interest-sensitive asset transfers subject to AFRs as part of IRS income reporting.

Why Review IRS Publication of AFRs

IRS publication of Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property, Section 1274, Rev. Rul. 2021-23, “provides various prescribed rates for federal income tax purposes for December 2021.” The publication outlines annual, semi-annual, monthly, as well as short-term, mid-term, and long-term compounded rates. AFRs impact tax accountability of gifts and estates, installment sales, and intra-family lending agreements

How AFRs Impact Estates

An element of the estate financial planning, taxable interest rates on trust income are subject to tax treatment under IRC Code § 7520  guiding the assignment of AFRs. The IRS applies the “7520 rate” as it is sometimes called, to determine gift and estate-tax value of annuities; interest for a term or life on an asset; or the value of a lifetime gift or testamentary transfer requiring reversionary, or remainder interest applied the month of transfer. The 7520 rate is 120 percent is the applicable mid-term rate with semi-annual interest compounding, followed by rate adjustment to the equivalent yield of an annual compound rate, subject to application of a rounding convention of the nearest two-tenths of a percent.

The minimum acceptable interest rate, AFRs are a safe-harbor provision the IRS permits estates to apply to a range of transfers. This includes loans made between family members. Popular alternative to estate asset distribution via gift or trust transfer, beneficiaries, AFRs generally reduce the amount of income tax owed to the IRS at time of funds receipt. Charitable life estates incur AFRs two months preceding transfer of a testamentary estate transfer or life-time gift transfer.

Consult a Planned Giving Specialist

With changes in federal IRS laws for gifts and estate trust transfers, it is important to stay abreast of recent changes to AFRs affecting key assets. Information about AFRs and guidelines for tax reporting of estate assets can be obtained from a CPA or professional planned giving specialist experienced in estate planning guidelines. Similar with tax incentives tied to nonprofit 501(c)3 charitable giving, estates can benefit from knowledge of AFRs affecting annual IRS reporting. For this reason, wider application of a “blended annual rate” permitted under IRC Code § 7872(e)(2)(A) is of key consideration. The blended rate applies to gifts and estate assets of a fixed-principal amount.

Estate planners and planned giving specialists can review the latest IRS periodic Applicable Federal Rates (“AFRs”) indices applied to estate and gift transfers involving beneficiaries.

Planned Giving Wiki

This is the definitive resource for professional gift planners. It covers all of the relevant information you’ll ever need as far as technical details go.