Significant interest rate decreases enable charitable giving valuation opportunity.

• Author: Reiner, S. Theodore

Recently, interest rates have been falling. A significant change in interest rates presents planning opportunities in charitable lead and remainder trusts. Charitable gifts in trust are valued under the rules of Sec. 7520. Sec. 7520(a) provides that the applicable interest rate for determining the value of an annuity, life interest or remainder is 120% of the federal mid-term rate for the month in which the transfer takes place, rounded to the nearest two-tenths of a percent. However, the taxpayer may elect to use the rate in effect for either of the preceding two months rather than the rate for the month of transfer. In a market in which interest rates change, the general rule is "the higher the interest rate the higher the value of the life estate and the lower the interest rate the higher the value of the remainder."

When valuing a transfer to a charitable lead trust, the month with the highest applicable rate should be selected. The opposite strategy should be used in valuing a remainder interest. Example: In December the applicable rate was 8.4%; in November, 8.6%; and in October, 9%. In December, a 65-year-old taxpayer creates a charitable lead annuity trust and funds it with $100,000. If the trust is valued as of December, the contribution is worth $66,472. If the trust is valued...