by John Darer CLU ChFC MSSC CeFT RSP CLTC
The Applicable Federal Rate is pretty much useless for a seller or potential seller of structured settlement payments, as it artificially boosts the present value and can make the seller believe they’re getting a better deal than they really are.
What is the Applicable Federal Rate (AFR)?
See IRC 7520
Rev. Rul. 2019-14 (separate one issued each month) This revenue ruling provides various prescribed rates for federal income tax purposes for June 2019 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
The Applicable Federal Rate (AFR) is Not Good for Buyers Either
A structured settlement sold is always worth pennies on the dollar to the seller. The use of AFR to calculate discounted present value just makes the transaction seem like more of a rip off than it is. No structured settlement buyer, to my knowledge, has a cost of money of 2.8%. JG Wentworth is purported to have 4%.
What is the Effective Discount Rate?
The effective discount rate is the rate used in present value calculations that accounts for all expenses and charges associated with a transaction. Some states define it as being equivalent to paying interest at a rate of X%. It serves as the only fair benchmark for individuals seeking to raise funds to compare against alternative financing options.