Charitable Deductions: Use Low Interest Rates to Your Tax Advantage #2

Certain planning techniques involve the use of interest rates to value interests being transferred to a charity or to private beneficiaries. While the use of these techniques does not necessarily depend on the interest rate, low interest rates may increase their value.

Taxpayers can obtain a deduction by giving a partial interest in property to a charity, using a trust. Two types of trusts for this purpose are charitable lead trusts and charitable remainder trusts. The IRS’s applicable federal rate (AFR) is used to value these different interests in trusts.

When AFRs are low, certain transfer mechanisms become even more useful. In a charitable lead trust (CLT), a low AFR increases the present value of the charity’s income interest. This increases the value of the charitable deduction for the income interest and reduces the value of the remainder interest passing to private individuals. For a charitable remainder trust, the same mechanism increases the present value of the individual beneficiary’s income interest and reduces the value of the remainder interest going to charity.



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