On Thursday, the Internal Revenue Service announced federal rates for the month of August under §§ 1274 and 7520 of the Internal Revenue Code (“IRC”) that will be lower than some of the previously record-low rates for June.
- The §7520 rate, which is used to value life estate, remainders, and annuities, will be only 0.4%. (The rate for June was 0.6%.)
- The federal mid-term rate under §1274, which defines the market rates of interest for purposes of intra-family loans under §7872 (among other things), will be 0.41%, which is a new record low. The August short-term rate of 0.17% is not a record low, because that rate was 0.16% in October of 2011 (0.18% in June), and the long-term rate of 1.12% is not a record because it was 1.01% in June.
The §7520 rate of 0.4% is peculiar because that rate is defined as 120% of the federal mid-term rate, and yet the mid-term rate is 0.41%. The rate that is 120% of the mid-term rate can be less than 100% of the mid-term rate because the §7520 rate must be rounded to the nearest two-tenths of a percent. Multiplying 0.41% by 120% produces 0.492%, which rounds down to 0.4% (which is the nearest percentage evenly divisible by 0.2%).
For information on estate planning techniques to take advantage of these low rates, see “Low-Interest Estate Planning Strategies.”