IRC Section 7520 dictates the discount rate used for calculating the charitable deduction for all “split interest” charitable gifts. The 7520 rate is also known as the Applicable Federal Rate, AFR, or simply the “Discount Rate”. Another way to describe the “Discount Rate” is to think of it as the “IRS earnings assumption”. More specifically, the “Discount Rate” is equal to 120% of the Federal Mid-term rate, rounded to the nearest 2/10ths of 1%, as determined monthly from the auctions of U.S. Treasury securities.
The current “Discount Rate” is published monthly by the IRS; however under IRC Sec. 7520(a), taxpayers may choose the rate applicable during the month the gift was completed, or may use a rate that applied during either of the two months preceding the completed gift.
For gifts to charitable remainder trust’s and charitable gift annuities, using a higher discount rate is advantageous because that produces a bigger income, gift or estate tax charitable deduction. Alternatively, for charitable gift annuities, using a lower discount rate is advantageous if the donor desires a larger tax-free payout for the annuitant in exchange for a lower charitable deduction for the donor. For charitable lead trusts, using a lower discount rate is advantageous because it produces a larger charitable deduction.