April 7520 Rate Dips to 3.4%

April 7520 Rate Dips to 3.4%

News story posted in Revenue Rulings on 19 March 2008| 4 comments
audience: National Publication | last updated: 18 May 2011


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

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
                                     ______   __________   _________   _______
 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%
 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%
 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
                                     ______   __________   _________   _______
 adjusted AFR                         1.99%       1.98%       1.98%     1.97%
 adjusted AFR                         3.28%       3.25%       3.24%     3.23%
 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%

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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.com

Effect 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

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