Drop in IRS interest rates provide planning opportunities
One silver lining to the current economic turmoil is that the interest rates that the IRS charges taxpayers for unpaid taxes are dropping. The interest rate assumptions used in income and estate planning, too, become more favorable for many taxpayers as a result.
Interest rates for the second quarter beginning April 1, 2009 have dropped by one full percentage point when compared to the rates for the previous quarter, the IRS has announced. The interest rates are calculated by adding percentage points to the federal short-term rate determined under the daily compounding rule.
The interest rates for overpayments and underpayments for April 1, 2009 - June 30, 2009 are as follows:
- 4 percent for underpayments;
- 6 percent for large corporate underpayments;
- 1.5 percent for the portion of a corporate overpayment exceeding $10,000;
- 4 percent for noncorporate overpayments; and
- 3 percent for corporate overpayments (except the portion exceeding $10,000).
Planning opportunities
Interest rates that the IRS charges taxpayers have not been as low since the third quarter of 2004. The current low-interest rate environment creates an opportunity to leverage the important features of certain tax and estate planning techniques to obtain significant transfer tax savings:
For private annuities, the lower the interest rates when the transaction is entered into, the lower the annuity payments made to the parent and the lower the gift tax cost.
For grantor retained annuity trusts (GRATs), gift tax is computed on the retained annuity interest, which is smaller as interest rates get lower.
For charitable dispositions, low interest rates provide an incentive to establish certain types of charitable trusts, such as a charitable lead annuity trust (CLAT). Lower interest rates also produce tax savings for individuals who transfer a remainder interest in their home to a charitable organization, but retain a life interest in the property.
For self-canceling installment notes (SCINs), a low interest rate effectively allows lower payments to be made by, and thus a greater transfer of wealth to, younger heirs.
For intrafamily loans, a low interest rate enables a parent to shift assets expected to increase in value to the younger generation at a lower tax cost.