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Planning Opportunities in Bad Economic Times
The current bleak state of financial affairs can be summarized as follows: the economy has slowed down, unemployment is at record highs, the financial markets are in a period of great uncertainty and interest rates are low. Are there some planning opportunities hidden amongst all of this bad news? The answer may be “yes” – particularly as a result of the low interest rates.

The Applicable Federal Rate
Each month, the IRS announces the minimum interest rate required to be charged for loans in order to avoid an imputed or implied gift of unstated interest. These rates are commonly known as the “Applicable Federal Rate” (“AFR”). The June 2020 AFR reflects the lowest rates seen for many years. The AFR for short-term loans of three years or less is only 0.18%. The AFR for medium term loans of three to nine years is 0.43% and for long term loans of more than nine years is 1.01%.

Planning Opportunities
These historically low rates make this an ideal time to consider any one or more of the following planning techniques:
  • Making loans to family members or family trusts which permits the borrower to invest the loan proceeds. This deflects income from one family member to another.
  • Selling assets to family members or family trusts in exchange for a promissory note. As discussed below, the minimum interest rate on the promissory note is the AFR.
  • Refinancing high interest loans of family members with a new loan using the AFR. This can save a family member the needless expense of high interest rates.
Sale of Assets in Exchange for a Promissory Note
An ideal planning opportunity is to sell assets to a family member or a family trust in exchange for a promissory note. (If the sale is to a trust then, as a rule of thumb, the trust should have assets equal to at least 10% of the value of the assets sold.) Typically, the promissory note provides for periodic interest payments with a lump sum payment of principal at the end of the loan term. So long as the sold assets grow at a rate greater than the AFR, then this results in a tax-free transfer of wealth. Given the current low AFR’s, that is much easier than it used to be.
If the sale is to a special type of trust known as a “grantor trust” then, even if the assets are sold at a gain, nothing will be taxable to the seller for federal income tax purposes. In addition (and if desired), the trust can be structured so that the seller is taxed on all of the income generated by the sold property. This can be desirable in some situations because, when the seller pays the income tax on the sold property, the seller is, in essence, making a “tax-free” gift in the amount of each tax payment, thereby increasing the real amount of wealth transferred.