Section 7520 Rate

The Section 7520 rate, named for the Internal Revenue Code section that created it, is set each month by the IRS as a fixed percentage tied to prevailing interest rates. It represents the assumed rate of return that the IRS uses when calculating the present value of future payments or the value of what passes to different parties in a split-interest trust. The actual rate changes monthly; families and advisors must verify the current figure directly with a qualified tax professional or from official IRS publications.

The rate matters enormously in the mechanics of certain estate-planning techniques. In a Grantor Retained Annuity Trust (GRAT), the IRS assumes the trust's assets will grow at the Section 7520 rate. If the actual investments outperform that assumed rate, the excess passes to heirs free of gift tax. A lower Section 7520 rate therefore makes GRATs more powerful, because the hurdle the assets must clear is lower. The same logic applies to Charitable Remainder Trusts and other split-interest arrangements.

A hypothetical family evaluating a GRAT during a period of very low prevailing interest rates might find the strategy particularly attractive precisely because the IRS hurdle rate is also low. Conversely, a high Section 7520 environment raises the bar assets must clear to produce a transfer-tax benefit. A common confusion is treating the Section 7520 rate as static. Because it changes monthly, the timing of when a trust is funded, not just whether to fund it, becomes a planning consideration. A qualified estate attorney and CPA must evaluate whether any particular structure is appropriate for a given family's circumstances.