• July Interest Rates Down for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts
  • July 26, 2010 | Authors: Mitchell M. Gaswirth; Albert W. Gortz; George D. Karibjanian; Andrew M. Katzenstein; Henry J. Leibowitz; David Pratt; Lawrence J. Rothenberg; Lisa M. Stern; Philip M. Susswein
  • Law Firms: Proskauer Rose LLP - New York Office ; Proskauer Rose LLP - Los Angeles Office ; Proskauer Rose LLP - New York Office ; Proskauer Rose LLP - Boca Raton Office ; Proskauer Rose LLP - New York Office
  • The July applicable federal rate (“AFR”) for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.8%, the lowest rate so far this year.  The rate for use with a sale to a defective grantor trust, SCIN or intra-family loan, with a note of 9-year duration (the mid-term rate, compounded annually), is also down to 2.35%.  Remember that lower rates work best with GRATs, CLATs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans.  The combination of a still low AFR and a decline in the financial and real estate markets continues to present a potentially rewarding opportunity to fund GRATs in July with depressed assets you expect to perform better in the coming years.  However, there is legislation currently pending in Congress which would significantly curtail short-term and zeroed-out GRATs.  Therefore GRATs should be funded immediately in order to be grandfathered from the effective date of any new legislation that may be enacted.

    Clients also should continue to consider “refinancing” existing intra-family loans. The AFRs (based on annual compounding) used in connection with intra-family loans are 0.61% for loans with a term of 3 years or less, 2.35% for loans with a term of 9 years or less and 3.94% for loans with a term of longer than 9 years.

    Thus, for example, if a nine-year loan is made to a child and the child can invest the funds and obtain a return in excess of 2.35%, the child will be able to keep any returns over 2.35%.  These same rates are used in connection with sales to defective grantor trusts.