The average person is enjoying many benefits in the current interest rate environment. People have been able to refinance their home, secure a new mortgage or take out a home equity line of credit at historically low rates.

For affluent individuals and families, however, there is more to the story. Current market conditions have impacted another interest rate: the Internal Revenue Code Section 7520 rate. Also known as the “discount” or “hurdle” rate, the Internal Revenue Code Section 7520 Rate is set each month by the IRS, and it is essential to the determination of the different property interests in split-interest trusts such as Grantor Retained Annuity Trusts (GRATs), Charitable Lead Trusts (CLTs), Charitable Remainder Trusts (CRTs) and Qualified Personal Residence Trusts (QPRTs).

In lay terms, the Section 7520 rate is the approved rate used by the IRS for discounting present values, annuities or future interests. Computationally, it is pegged monthly at 120 percent of the mid-term AFR rate and rounded to the nearest two-tenths of a percent. In both August and September, the 7520 rate was 1 percent.

Other leading wealth advisors have written articles for this magazine that detail the mechanics of the four trust types listed above, so I will spare you a repeat lesson. However, it may be helpful to know which of the above trusts work well when the 7520 rate is high, and which work well when it is low, as it is now.

Let us begin with the QPRT. All other things being equal, the higher the 7520 rate, the higher the retained value of the grantor’s use of the property will be for the trust term, and, as a result, the lower the size of the gift. Therefore, in the current low-rate environment, it could be said that the time to set up a QPRT is not optimal if one is concerned with maximizing the leverage involved in setting up this type of trust. All other things being equal, a CRT also works better when the 7520 is high.

On the other hand, considering a GRAT and/or a CLT in the current low 7520 rate environment could, in fact, be optimal. Let us consider the GRAT first: If the grantor has assets that are expected to grow in an amount such that the earnings and growth combined will exceed the “hurdle” rate, all of the appreciation in excess of this 7520 rate will be shifted to the remainder beneficiaries without any transfer tax cost. Therefore, the lower the 7520 rate, the better. Just to reiterate: The 7520 or “hurdle” rate for August and September was 1 percent. Certainly, there are assets already in your portfolio that are projected to grow more than 1 percent over a two-or three-year period (a typical GRAT tenure), so why not consider this technique in the current environment?

A CLT also works better when the 7520 rate is low, all other things being equal. The lower the rate, the higher the gift or estate tax deduction is for the donor, thereby lowering the amount of the actual gift (assuming a nongrantor trust). Of course you need to be philanthropic to consider the CRT or CLT, but the majority of families I have worked with over the years would rather be philanthropic than just let the government tax and redistribute their wealth.

The Section 7520 rate is a very important interest rate for affluent families to become familiar with as they prepare to pass assets to the next generation.

Eric S. Wilson is a Wealth Advisor with the Wealth Management division of Morgan Stanley in Macon, GA. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC. Morgan Stanley Financial Advisor(s) engaged Worth to feature this profile. Eric S. Wilson may only transact business in states where he is registered or excluded or exempted from registration: http://www.morganstanleyfa.com/ericwilson. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Eric S Wilson is not registered or is excluded or exempt from registration. The strategies and/or investments referenced may not be suitable for all investors. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors or private wealth advisors do not provide tax or legal advice. This material was not intended nor written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.