United States

December section 7520 rate at 1.8 percent; a blip or a clarion call?

While still historically low, key rates could now be on the rise


The IRS announced in Rev. Rul. 2016-27 that the section 7520 rate for December will rise to 1.8 percent. Applicable rates for other interest rate-sensitive wealth transfer and charitable planning vehicles rose in essentially lock step.

In what might qualify as the understatement of the year, this very slight increase in the section 7520 rate is not exactly page one news in aftermath of the election and the predictions of the coming demise of the ‘death tax.’ But it is news, as it follows on the heels of last month’s 20 basis point increase. So, a little perspective on the importance of this move is in order.

If past is prologue, repeal of the estate tax might well leave the gift tax intact, albeit at a threshold and tax rate that remains to be seen. If that scenario comes to pass, an individual who wishes to transfer a significant asset to a child (or a trust for that child) will want to reduce the tax cost associated with that transfer, just as he or she would now. Thus, depending on the value of the asset, the tax cost of an outright gift may be too dear, either because it consumes too much exemption or actually triggers gift tax. And, with estate tax repeal in the offing, such an individual could seriously question the wisdom of making a down payment on the estate tax by paying gift tax.

When confronted by the tax economics of an outright gift of a valuable asset, many individuals turn to estate freeze techniques such as grantor-retained annuity trusts and sales to (hopefully already funded) defective trusts in an effort to transfer at least some of the future appreciation in an asset’s value to the next generation. These techniques, as well others such as the intra-family loan and charitable lead annuity trust, are exquisitely sensitive to the interest rate used to either calculate the gift tax result of the technique, the hurdle rate for success of the technique or both. The higher the rate, the higher the ‘toll’ required for the technique to work.  

Year-end tax planning was no doubt well underway before the election. Now it’s game time, but the rules are in flux, leaving individuals in a real quandary about whether they should act now or wait until they have a better handle on the long-term implications of any major steps taken today. A reasonable middle course for an individual otherwise already inclined to make a significant gift could be to make an outright gift that does not trigger gift tax or, if more appropriate in the particular situation, do a freeze that involves little or perhaps no use of exemption.

Yes, there is a lot happening in the wealth transfer planning realm. But a well thought out, well-constructed transfer today could enable an individual to reflect in the years ahead on just how prescient he or she was in late 2016.


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