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April 7520 Rate Dips to 3.4%
Summary
For purposes of determining the present value of an annuity, an
interest for life or a term of years, or a remainder or a reversionary
interest, Revenue Ruling 2008-20 indicates the applicable federal rate
under section 7520 for April 2008 is 3.4%; down 0.2% from the March
rate of 3.6% and down 0.8% from the February rate of 4.2%.
Rev. Rul. 2008-20; 2008-14 IRB 1
Part I
Section 1274.--Determination of Issue Price in the Case of Certain
Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846,
1288, 7520, 7872.)
Full Text:
Mar. 18, 2008
Part I
Section 1274.--Determination of Issue Price in the Case of Certain
Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846,
1288, 7520, 7872.)
This revenue ruling provides various prescribed rates for
federal income tax purposes for April 2008 (the current month). Table 1
contains the short-term, mid-term, and long-term applicable federal
rates (AFR) for the current month for purposes of section 1274(d) of
the Internal Revenue Code. Table 2 contains the short-term, mid-term,
and long-term adjusted applicable federal rates (adjusted AFR) for the
current month for purposes of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the long-term tax-exempt rate
described in section 382(f). Table 4 contains the appropriate
percentages for determining the low-income housing credit described in
section 42(b)(2) for buildings placed in service during the current
month. Finally, Table 5 contains the federal rate for determining the
present value of an annuity, an interest for life or for a term of
years, or a remainder or a reversionary interest for purposes of
section 7520.
REV. RUL. 2008-20 TABLE 1
Applicable Federal Rates (AFR) for April 2008
Period for Compounding
______________________
Annual Semiannual Quarterly Monthly
______ __________ _________ _______
Short-term
__________
AFR 1.85% 1.84% 1.84% 1.83% 110% AFR 2.03% 2.02% 2.01% 2.01% 120% AFR 2.22% 2.21% 2.20% 2.20% 130% AFR 2.40% 2.39% 2.38% 2.38%
Mid-term
________
AFR 2.87% 2.85% 2.84% 2.83% 110% AFR 3.16% 3.14% 3.13% 3.12% 120% AFR 3.45% 3.42% 3.41% 3.40% 130% AFR 3.74% 3.71% 3.69% 3.68% 150% AFR 4.33% 4.28% 4.26% 4.24% 175% AFR 5.05% 4.99% 4.96% 4.94%
Long-term
_________
AFR 4.40% 4.35% 4.33% 4.31% 110% AFR 4.85% 4.79% 4.76% 4.74% 120% AFR 5.29% 5.22% 5.19% 5.16% 130% AFR 5.74% 5.66% 5.62% 5.59%
REV. RUL. 2008-20 TABLE 2
Adjusted AFR for April 2008
Period for Compounding
______________________
Annual Semiannual Quarterly Monthly
______ __________ _________ _______
Short-term
adjusted AFR 1.99% 1.98% 1.98% 1.97%
Mid-term adjusted AFR 3.28% 3.25% 3.24% 3.23%
Long-term adjusted AFR 4.55% 4.50% 4.47% 4.46%
REV. RUL. 2008-20 TABLE 3
Rates Under Section 382 for April 2008
Adjusted federal long-term rate for the current month 4.55%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.55%
REV. RUL. 2008-20 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for April 2008
Appropriate percentage for the 70% present value low-income housing credit 7.84%
Appropriate percentage for the 30% present value low-income housing credit 3.36%
REV. RUL. 2008-20 TABLE 5
Rate Under Section 7520 for April 2008
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 3.4%
Remember the option to use previous 2 months
I just ran a 2-life CRAT, ages 60/60, 5% payout end of year, at 3.4% AFR, and indeed, it failed the 5% probability test. I re-ran it at 4.2% AFR (the February rate), and it passed. So, for somebody on the bubble, remember you can elect to use the AFR from either of the previous 2 months. The real solution, though, is for Congress to get rid of the 5% minimum payment rule. If a donor wants to keep less money, and leave more to charity, why should Congress discourage that? If I take 0%, and give 100% to charity right now, I get a deduction. If I keep 5%/yr. for myself, and leave the remainder to charity, I get a deduction. Why the 0% - 5% "window"? Why should there be a penalty if I take out something between 0% and 5% for myself, and leave the rest for charity? It's an irrational law.yes, I have
By my calculation, the 3.4 percent rate precludes a gift annuity at the recommended ACGA rates for a donor age 53 or younger, though of course you could use a lower rate. A CRAT paying the minimum five percent will fail the "probability of exhaustion test" for a donor aged 62 or younger. Russell A. Willis III, J.D., LL.M. 5158 Waterman Blvd. (Rear) St. Louis, MO 63108 314.566.3386, rawillis3@juno.com Charitable Planned Gift Design Services https://www.charitableplanning.comEffect of AFR on PVR and 5% Probability Test
Great point Vaughn. Both the present value computation and the five percent probability test (applicable only to CRATs) are highly sensitive to the AFR, whereas CRUTs are for the most part immune from changes in the AFR (it affects only the Table F adjustment factor for payment frequency). I would be particularly careful to make sure a CRAT that barely satsifies the 10% present value of remainder interest test also passes the 5% probability test. It is possible to pass the first test and fail the second. Donors who have difficulty qualifying under these tests should consider a CRUT or charitable gift annuity.AFR drops to AFR - CRAT traps
Have you run a CRT deduction calculator lately? I'd be concerned about the 3.4% AFR for April if you're proposing any sort of lifetime payout CRAT for clients/donors. On the drafting side of things, if you're planning any sort of testamentary CRAT, there should be some consideration to adding some flexibility to the language to substitute a CRUT or make it a term of years trust since 5% is the lowest payout allowed.Vaughn W. Henry
Springfield, IL 62703
217.529.1958 voice
217.529.1959 fax
(gift-estate.com)