Wealth Management Update

February Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts

The February § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.2%, which is a slight increase from January's rate of 1.0%. The applicable federal rate ("AFR") for use with a sale to a defective grantor trust, self-canceling installment note ("SCIN") or intra-family loan with a note of a 9-year duration (the mid-term rate, compounded annually) is 1.01%, which is up slightly from the January rate of 0.87%, but still relatively low. Remember that lower rates work best with GRATs, CLATs, sales to defective grantor trusts, private annuities, SCINs and intra-family loans. The combination of a low § 7520 rate and financial and real estate markets which remain undervalued presents a potentially rewarding opportunity to fund GRATs in February with depressed assets you expect to perform better in the relatively near future.

Clients also should continue to consider refinancing existing intra-family loans. The AFRs (based on annual compounding) used in connection with intra-family loans are 0.21% for loans with a term of 3 years or less, 1.01% for loans with a term of 9 years or less, and 2.52% for loans with a term longer than 9 years. Thus, for example, if a 9-year loan is made to a child and the child can invest the funds and obtain a return in excess of 1.01%, the child will be able to keep any returns over 1.01%. These same rates are used in connection with sales to defective grantor trusts.

IRS Issues Revenue Procedure 2013-15

In Revenue Procedure 2013-15, the IRS announced the 2013 inflation adjustments, including the income tax rate schedules, and other tax changes resulting from the American Taxpayer Relief Act of 2012 ("ATRA"). For 2013, the estate tax exemption is $5,250,000, which is an increase from $5,120,000 for 2012. Under ATRA, the estate tax exemption, lifetime gift tax exemption and GST exemption are "unified," and thus, the same amount.

As a reminder, the IRS previously released Revenue Procedure 2012-41, which provides that the annual exclusion for gifts made in 2013 is $14,000, which is an increase from $13,000 for 2012.

Private Letter Ruling 201245004

The IRS ruled that the surviving spouse could disclaim her interest in an Individual Retirement Account ("IRA") even though she had received distributions from the IRA prior to the disclaimer.

The decedent named his...