IRC 7520 Rate: What It Is and How It Is Used
The monthly IRS rate that values annuities, life estates, and remainders — where it comes from and why it matters for GRATs and charitable trusts
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The section 7520 rate is the interest rate the IRS publishes each month for valuing annuities, life estates, terms of years, remainders, and reversions for income, estate, and gift tax purposes. It equals 120 percent of the federal midterm rate, rounded to the nearest two-tenths of a percent, and it sets how much of a GRAT is a gift.
On this page
Where does the rate come from?
Each month the IRS publishes the applicable federal rates (AFRs) — short-term, midterm, and long-term — derived from the average market yields on federal obligations. The section 7520 rate is 120 percent of the midterm AFR (the rate for obligations of three to nine years), rounded to the nearest 0.2 percent, and published in the same revenue ruling. It moves with interest rates: 0.4 to 1.6 percent from mid-2020 through 2021, roughly 4.2 to 5.8 percent in 2023–2024, and 5.6 percent for October 2026 (the IRS's section 7520 page lists each month's rate). A taxpayer valuing a transfer uses the rate for the month of the transfer, or may elect the rate for either of the two preceding months for charitable transfers.
What does it value?
Any transfer that splits an asset's value across time or between people: the right to receive a fixed annuity for a term or a life, the right to use property for life (a life estate) or for a term, and what is left afterward (the remainder). The IRS's actuarial tables (Publications 1457, 1458, and 1459 — Actuarial Values Versions 4A, 4B, and 4C) combine the section 7520 rate with the term or the measuring life's mortality to produce a factor; the factor times the property's value is the value of the interest. The rate is the assumed rate of return the property earns — so a higher rate makes an income interest worth more and a remainder worth less, and vice versa.
Which planning techniques depend on it?
| Technique | What the 7520 rate does | Favored when the rate is |
|---|---|---|
| Grantor retained annuity trust (GRAT) | The rate is the hurdle the trust's assets must outperform for value to pass to the remainder beneficiaries gift-free; the annuity is set so the remainder's present value is near zero ("zeroed out") | Low — a low hurdle is easy to beat |
| Charitable lead annuity trust (CLAT) | Values the charity's lead annuity; a low rate makes the annuity worth more, shrinking the taxable remainder gift | Low |
| Intra-family installment sales and loans | The AFR (not 7520) sets the minimum interest; the same market drives both | Low |
| Charitable remainder annuity trust (CRAT) | Values the donor's retained annuity; a higher rate makes the charitable remainder — the deduction — larger, and helps pass the 10 percent remainder and 5 percent exhaustion tests | High |
| Qualified personal residence trust (QPRT) | Values the grantor's retained right to live in the home; a higher rate makes that retained interest worth more, so the remainder gift is smaller | High |
| Charitable gift annuities and life estates | Higher rate → larger charitable deduction for a remainder; smaller value for an income interest | High for remainder gifts |
The rule of thumb: techniques that transfer future growth (GRATs, CLATs, sales to grantor trusts) work best when rates are low; techniques where the donor keeps an income or use interest (QPRTs, CRATs) work best when rates are high.
Why does a low rate favor GRATs?
A GRAT pays the grantor an annuity for a term and gives what's left to the beneficiaries. The gift is the present value of the remainder, computed at the section 7520 rate. Set the annuity high enough and the remainder's present value is near zero — a negligible gift. If the trust's assets actually grow faster than the 7520 rate, the excess passes to the beneficiaries with no gift tax. At a 1 percent rate, almost any real portfolio beats the hurdle; at 5 percent, the assets must earn more than 5 percent before anything passes. The rate at funding is locked for the GRAT's life, which is why GRAT funding clusters in low-rate months.
Where does it appear on a small business owner's return?
In the estate plan more than the income tax return: valuing the gift of a business interest to a GRAT, the charitable deduction for a CRT funded with appreciated stock (the cross-border charitable giving guide covers the deduction side), a life estate retained on a transferred farm or building, or the remainder interest in a QPRT holding the family home. Form 709 (gift tax) reports the values; Form 8283 supports charitable deductions; and the month's rate is the one number every one of those valuations shares.
Worked example
A business owner funds a two-year zeroed-out GRAT with US$2 million of S corporation stock in a month when the section 7520 rate is 4.4 percent. The annuity is set so that the present value of the two payments, discounted at 4.4 percent, equals US$2 million — about US$1,067,000 a year. Taxable gift: roughly zero. If the stock grows at 12 percent a year, the trust holds about US$2.51 million at the end of year two, pays out about US$2.13 million in annuities (plus growth on the balance), and passes roughly US$250,000 to the children gift-tax-free. Had the rate been 1.2 percent (as in 2021), the annuity would be about US$1,018,000 and the amount passing about US$351,000 — the lower hurdle transferred more. Had the stock grown at only 3 percent, below the 4.4 percent hurdle, nothing would pass and the annuities would simply return the assets to the grantor — no harm, but no transfer.
Frequently asked questions
What is the section 7520 rate?
The monthly IRS rate — 120 percent of the federal midterm applicable federal rate, rounded to the nearest 0.2 percent — used to value annuities, life estates, terms of years, remainders, and reversions for tax purposes.
How is the 7520 rate determined?
From the midterm AFR, which is derived from average market yields on federal obligations with three-to-nine-year maturities, multiplied by 120 percent and rounded. It is published monthly in a revenue ruling.
Why does a low 7520 rate favor GRATs?
The rate is the growth hurdle the trust's assets must beat for value to pass gift-free to the beneficiaries. A low rate is a low hurdle, and the rate is locked at funding.
Where do I find the current rate?
On the IRS's section 7520 interest rates page, updated monthly, and in the monthly revenue ruling that publishes the applicable federal rates.
Official sources
The IRS states: “Pursuant to Internal Revenue Code 7520, the interest rate for a particular month is the rate that is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls. That rate is then rounded to the nearest two-tenths of one percent.” — Internal Revenue Service, Section 7520 interest rates, https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates
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