The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the following month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate-planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances, and should be undertaken only with the advice of competent tax counsel and financial advisors.

The IRS has issued Revenue Ruling 2018-30, which provides the AFRs and 7520 rate for December 2018. Revenue Ruling 2018-30 appeared in Internal Revenue Bulletin 2018-49, dated Dec. 3, 2018.

What is the Applicable AFR? The applicable AFR is the minimum acceptable or safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences – based on the month in which the loan is made, how frequently interest is compounded, and the length or term of the loan.

AFRs Trending Up. Following a slight decrease in the mid-term and long-term rates for October 2018, AFRs increased across the board for November and again for December 2018, making intra-family loans and installment sales to grantor trusts generally less attractive.

December AFRs Summary. The AFRs for December 2018 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term 2.76% 2.74% 2.73% 2.72%
Mid-Term 3.07% 3.05% 3.04% 3.03%
Long-Term 3.31% 3.28% 3.27% 3.26%

2018 Historical AFRs. The AFRs for January through December 2018 are as follows, in reverse chronological order:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
December 2018 2.76% 2.74% 2.73% 2.72%
November 2018 2.70% 2.68% 2.67% 2.67%
October 2018 2.55% 2.53% 2.52% 2.52%
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
June 2018 2.34% 2.33% 2.32% 2.32%
May 2018 2.18% 2.17% 2.16% 2.16%
April 2018 2.12% 2.11% 2.10% 2.10%
March 2018 1.96% 1.95% 1.95% 1.94%
February 2018 1.81% 1.80% 1.80% 1.79%
January 2018 1.68% 1.67% 1.67% 1.66%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
December 2018 3.07% 3.05% 3.04% 3.03%
November 2018 3.04% 3.02% 3.01% 3.00%
October 2018 2.83% 2.81% 2.80% 2.79%
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
June 2018 2.86% 2.84% 2.83% 2.82%
May 2018 2.69% 2.67% 2.66% 2.66%
April 2018 2.72% 2.70% 2.69% 2.68%
March 2018 2.57% 2.55% 2.54% 2.54%
February 2018 2.31% 2.30% 2.29% 2.29%
January 2018 2.18% 2.17% 2.16% 2.16%
Long-Term AFRs – For notes with a term in excess of nine years.
December 2018 3.31% 3.28% 3.27% 3.26%
November 2018 3.22% 3.19% 3.18% 3.17%
October 2018 2.99% 2.97% 2.96% 2.95%
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%
June 2018 3.05% 3.03% 3.02% 3.01%
May 2018 2.94% 2.92% 2.91% 2.90%
April 2018 3.04% 3.02% 3.01% 3.00%
March 2018 2.88% 2.86% 2.85% 2.84%
February 2018 2.66% 2.64% 2.63% 2.63%
January 2018 2.59% 2.57% 2.56% 2.56%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate for December 2018. The 7520 rate for December 2018 is 3.6%.

7520 Rate Trending Up. The 7520 rate increased steadily during the beginning of 2018, remained at 3.40% for June 2018 to October 2018, and increased to 3.6% for November 2018 and December 2018, making planning techniques like qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) increasingly attractive. Conversely, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) have become generally less attractive as a result of this upward trend.

2018 7520 Rates. The 7520 rates for January through December 2018 are as follows, in reverse chronological order:

7520 RATE
December 2018 3.60%
November 2018 3.60%
October 2018 3.40%
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%
June 2018 3.40%
May 2018 3.20%
April 2018 3.20%
March 2018 3.00%
February 2018 2.80%
January 2018 2.60%

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Photo of Carmen Irizarry-Diaz Carmen Irizarry-Diaz

Carmen Irizarry-Díaz assists US and international private clients in accomplishing their personal goals for legacy planning and charitable giving. Her practice encompasses all aspects of tax and charitable planning and related instruments and structures – including charitable foundations and trusts – the administration…

Carmen Irizarry-Díaz assists US and international private clients in accomplishing their personal goals for legacy planning and charitable giving. Her practice encompasses all aspects of tax and charitable planning and related instruments and structures – including charitable foundations and trusts – the administration of trusts and estates, and related tax reporting and compliance, including the representation of clients and estates in intra-family controversies as well as before the Internal Revenue Service and other tax authorities. Carmen’s client base includes corporate executives, philanthropists, professionals, families with complex issues (including children with special needs), charitable entities, fiduciaries, and business owners – whom she also counsels on the efficient lifetime and death transfer, restructuring, and succession planning of their business interests, including sales, ESOPs, and other exit strategies. Carmen also advises accounting professionals on the reporting of transactions and compliance with adequate disclosure requirements.

Carmen is an empathetic listener who endeavors to understand her clients’ singular perspectives to best design their legacy plan and further their goals for preserving family harmony, providing incentives for social responsibility and positive values, and addressing the financial and philanthropic education of their legacy recipients. Carmen’s high standards of commitment to her clients and years of experience enable her to pinpoint core issues, create alternative and innovative courses of action, and identify the best strategies and opportunities while simplifying complexity, identifying efficiencies, and motivating others to take action, all in a client-centric, collaborative, and tax-conscious manner.

Carmen is a Martindale Hubbell AV® Preeminent (5 out of 5) rated tax attorney for ethical standards and professional ability in the areas of legal knowledge, analytical capabilities, judgment, communication, and legal experience, based on evaluations by other attorneys and the judiciary in the United States.