Wealth Management Update

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

The March § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.4%, which is a slight increase from February's rate of 1.2%. 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 9-year duration (the midterm rate, compounded annually) is 1.09%, which is up slightly from the January rate of 1.01% 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 0.22% for loans with a term of 3 years or less, 1.09% for loans with a term of 9 years or less, and 2.66% for loans with a term of 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 1.09%, the child will be able to keep any returns over 1.09%. These same rates are used in connection with sales to defective grantor trusts.

Estate of Giovacchini v. Commissioner, T.C. Memo 2013-27

The Tax Court redetermined values for estate and gift tax purposes of a large parcel of more than 2,500 acres of land near Lake Tahoe, California, transferred to an LLC controlled by the transferor's children. The court rejected the appraisals provided by both the taxpayer and the IRS basing the valuation on parts of both appraisals, taking into account a sale that occurred after both the gift and estate tax valuation dates. The court instead chose a value that was higher than the taxpayers reported, but lower than the value determined by the IRS. Although subsequent events normally are not admissible to determine a property's fair market value, the subsequent sale here was close enough in time to be a reasonable indication of value. Key to the court's holding was that the property was limited by numerous environment restrictions on its use and...