Leveraging Off of the Applicable Federal Rate

IRS Code Section 7520 establishes an investment rate of return, which was 5.8 percent as of May 2006. Any wealth in excess of this rate can be transferred to junior family members without incurring a taxable gift or estate tax. The lower the rate, the more wealth available and easier to transfer to junior family members. This applies to estate planning, even when all other tax-free gifting strategies have been implemented.

Individuals can leverage the 7520 rate by using Family Holding Company units, which provide discounting.

For example, the 7520 rate of 5.8% may be discounted at 35%, providing a taxable rate of 3.77%.

Any wealth in excess of 3.77 percent may be removed from the taxable estate, without incurring a gift or estate tax. Advanced estate planning trusts or sales of remainder interests in property is used to achieve this outcome.

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