Curiosity Killed the Cat
The Section 7520 Interest Rate is an important consideration when estate planners break out their toolkit of acronyms and gizmos.
This Applicable Federal Rate is published by the IRS and used for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest. (https://www.irs.gov/pub/irs-drop/rr-25-05.pdf).
I was asked recently what how this rate was related to the UST Yield Curve (and whether there was any dislocation).
I wasn’t sure so this was a good chance to satisfy a curiosity and review a common IRS rate.
Per the IRS definition, for a particular month (In Feb ‘25 happens to be 5.4%), the rate 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. For example, the rate that is 120 percent of the applicable federal rate (compounded annually) for January 2025 is 5.10 percent. That rate is then rounded to the nearest two-tenths of one percent or 5.2 percent for purposes of IRC 7520. (https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates)
I assumed that it would closely peg to the 5-Year Treasury since the medium term AFR is for loans between 3-9 years.
That said, I wasn’t sure and didn’t if the IRS made any independent interest rate determinations.
Thanks to @Liam Ballou, we got in under the hood and confirmed that the 5-year Treasury is a good proxy and tracks closely.
Going back to ’97, it looks like the IRS doesn’t veer too far from the market forces and Fed policy around interest rates.
*Out of curiosity, we included the Fed Funds rate in the chart. The lag looks attributable to usual yield curve dynamics around Fed policy-
Let us know if you see something different!
Heckerling Update: Purpose Trusts
I made it back from my annual pilgrimage to the Heckerling conference where the estate planning community goes to learn about the newest updates in the space: I’ll post some highlights and thoughts in coming emails.
In the meantime, a “new” estate and business succession planning tool received some mention.
The “Purpose Trust” is a vehicle that Europeans have been used to for a while that is gaining attention in the States after the Patagonia transaction.
What is a Purpose Trust?
As Susan Lipp. Editor-in-Chief of Trusts and Estates magazine, neatly summarized: “(Non-Charitable) purpose trusts are different from ordinary common law trusts because they have no ascertainable beneficiaries who have standing to enforce the trustee’s fiduciary obligations. Instead of serving beneficiaries, purpose trusts exist to serve a stated purpose. An enforcer or protector is appointed to enforce the trustee’s fiduciary obligations to serve the trust’s stated purpose.”
We could see these becoming popular options as they become better understood.
The rest of Susan’ excellent summary is here:
The California Wildfires and Parametric Insurance
As the Los Angeles area begins to process their recovery from the wildfires, we could be seeing the emergence of a new trend in Property and Casualty space: “Parametric Insurance.”
What is “Parametric Insurance?”
The experts at SwissRe have furnished a tight definition:
“Fundamentally, parametric (or index based) solutions are a type of insurance that covers the probability (or likelihood) of a loss-causing event happening (like an earthquake) instead of indemnifying the actual loss incurred from the event. It is an agreement to make a payment upon the occurrence of a covered event meeting or exceeding a pre-defined intensity threshold, as measured by an objective value (or parameter – hence the name 'parametric insurance').” (https://corporatesolutions.swissre.com/insights/knowledge/what_is_parametric_insurance.html)
As the California wildfire “Hurricane Andrew” impact deepens and longer-term climate effects continue to be better understood, past insurance company underwriting metrics are coming under new review.
Harvard Business Review has an article looking at the early development of this trend: https://hbr.org/2025/01/the-la-fires-could-change-the-insurance-industry
Look for a great deal of discussion about this and other forms of risk pooling as property insurance companies.