What Is the Current 7520 Rate and Why Does It Matter?

The Section 7520 rate is a figure published by the Internal Revenue Service (IRS) used to value specific financial interests for federal gift and estate tax calculations. For June 2025, the Section 7520 rate is 5.0%. This rate is fundamental for assigning a present-day value to future payments, such as an annuity, or the value of property that will be received at a later date, known as a remainder interest. This valuation provides a standardized method for determining the tax implications of estate planning strategies, ensuring consistency in how the IRS assesses these interests when gifts are made or estates are settled.

How the Rate is Determined

Each month, the IRS calculates the rate by taking 120% of the federal mid-term rate, compounded annually. This result is then rounded to the nearest two-tenths of a percent to establish the official Section 7520 rate for the upcoming month.

The foundation of this calculation is the applicable federal rate (AFR). The AFRs are a set of interest rates the IRS publishes monthly for various tax purposes, including setting the minimum interest rate for private loans. These rates are based on the average yields of outstanding U.S. Treasury securities. The AFR is categorized into short-term (for debts up to three years), mid-term (for debts over three years but not more than nine), and long-term (for debts over nine years). The Section 7520 rate specifically uses the mid-term AFR as its base, reflecting its application to transactions that often span several years.

The Role of the Rate in Valuing Future Interests

The primary function of the Section 7520 rate is to apply the financial principle of the time value of money to gift and estate tax law. This principle recognizes that a dollar received today is worth more than a dollar received in the future, because today’s dollar can be invested and earn interest. It provides a standard discount rate to determine what a future stream of income or a future inheritance is worth in today’s dollars for tax purposes.

This rate has an inverse relationship with the valuation of different components of a gift. When the Section 7520 rate is high, the present value of a future interest, known as a remainder interest, is lower. This is because a higher discount rate assumes the funds will grow more rapidly, so less principal is needed today to reach a specific future value. Conversely, a high rate increases the value of a current interest, like an annuity or income stream, because the assumed earnings on the underlying assets are greater.

When the Section 7520 rate is low, the opposite occurs. The present value of a future remainder interest becomes higher, as more principal is needed to achieve a target value with lower assumed growth. A low rate simultaneously decreases the calculated value of the current income interest.

Application in Common Estate Planning Strategies

The level of the Section 7520 rate directly influences the effectiveness of several estate planning techniques. For a Grantor Retained Annuity Trust (GRAT), a lower rate is advantageous. In a GRAT, the grantor contributes assets and retains the right to receive a fixed annual payment (an annuity) for a set number of years. Any appreciation in the trust assets above the 7520 rate at the time the GRAT was funded passes to the beneficiaries, often children, free of gift tax. A lower rate sets a lower performance hurdle for the trust’s investments, making it easier for the assets to outperform the rate and transfer wealth.

Charitable Lead Trusts (CLTs) are also sensitive to the 7520 rate. In a Charitable Lead Annuity Trust (CLAT), where a charity receives a fixed payment for a term, a lower 7520 rate is beneficial. The lower rate increases the present value of the remainder interest that will eventually go to non-charitable beneficiaries, but it also increases the value of the charitable annuity interest, leading to a larger upfront charitable gift tax deduction for the grantor. This can make the transfer to family members more tax-efficient.

Another common tool, the Qualified Personal Residence Trust (QPRT), benefits from a higher Section 7520 rate. A QPRT allows an individual to transfer a personal residence into a trust, retaining the right to live in the home for a specified term. The value of the taxable gift to the beneficiaries is the home’s fair market value minus the value of the grantor’s retained interest. A higher 7520 rate increases the value of this retained interest, thereby reducing the value of the taxable gift of the future remainder interest.