Wealth Management Update

March Interest Rates Decrease Slightly For GRATs, Sales To Defective Grantor Trusts, Intra-Family Loans And Split Interest Charitable Trusts

The March applicable federal rate ("AFR") for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 3.2%. The rate for use with a sale to a defective grantor trust, SCIN or intra-family loan, with a note of a 9-year duration (the mid-term rate, compounded annually), is 2.69%. These are slight decreases from February's rates. 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 AFR and a decline in the financial markets continues to present a potentially rewarding opportunity to fund GRATs in March with depressed assets you expect to perform better in the coming years.

Clients should also continue to consider "refinancing" existing intra-family loans. The AFRs (based on annual compounding) used in connection with intra-family loans are .64% for loans less than 3 years, 2.69% for loans less than 9 years and 4.35% for long-term loans. Thus, if a $1 million loan is made to a child and the child can invest the funds and obtain a 5% return, the child will be able to keep any returns over the mid-term AFR of 2.69%. These same rates are used in connection with sales to defective grantor trusts.

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IRS Alerts Taxpayers That It Intends To Issue Guidance Under Section 2511(c) – IRS Notice 2010-19 (February 16, 2010)

Section 2511(c) provides that, notwithstanding any other provision of Section 2511 and except as provided in the regulations, a transfer in trust is treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor's spouse under the grantor trust provisions.

Some advisors interpreted 2511(c) to mean transfers to wholly-owned grantor trusts during 2010 will not be treated as completed gifts for gift tax purposes. IRS Notice 2010-19 clarifies that such an interpretation is incorrect and that gifts to grantor trusts during 2010 may be completed gifts using the same criteria as was in effect on December 31, 2009.

The Notice clarifies that transfers in trust, which would otherwise be subject to gift tax are not excluded from the tax merely because the transfers would not be taxed under Section 2511(c). Section 2511(c) broadens the types of transfers subject to transfer tax to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.

Therefore, a transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor's spouse under the grantor trust rules is considered to be a transfer by gift of the entire interest in the property under Section 2511(c). The gift tax provisions in effect on December 31, 2009 continue to apply during 2010 to all transfers made to any other trust to determine whether the transfer is subject to gift tax.

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Tax Court Finds Transfer Of An Interest In A Limited Partnership And Timberland To An FLP Was Not Includible In The Decedent's Gross Estate Under Section 2036(a) Because The Transfer Was A Bona Fide Sale For Adequate And Full Consideration – Estate of Shurtz v. Commissioner, TC Memo 2010-21 (February 3, 2010)

This Tax Court decision provides another Section 2036 victory for the taxpayer by holding that assets transferred to an FLP were not includible in the decedent's gross estate under Section 2036(a) because the transfer was a bona fide sale for adequate and full consideration. This case is particularly taxpayer friendly because the Tax Court focused on the non-tax purposes for forming the FLP and was able to overcome several bad facts.

The Decedent, Mrs. Shurtz, died in California in 2002...