Wealth Management Update (April 2010)

As part of our ongoing efforts to keep wealth management professionals informed of recent developments related to our practice area, we have summarized below some items we think would be of interest. Please let us know if you have any questions.

April Interest Rates Remain Steady for GRATs and Split Interest Charitable Trusts and Increase Slightly for Sales to Defective Grantor Trusts and Intra-Family Loans

The April applicable federal rate ("AFR") for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 3.2%, the same as it was in March. 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 2.70%. This is a very slight increase from March's rate. 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 April 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 0.67% for loans less than 3 years, 2.70% for loans less than 9 years and 4.40% 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 2.70%. These same rates are used in connection with sales to defective grantor trusts.

Tax Court Finds that Value of Life Insurance Policy Sold from Profit-Sharing Plan to the Insured is Determined by Reference to the Policy's "Entire Cash Value," which Allows no Reduction for Surrender Charges, thereby Resulting in Taxable Income from Bargain Sale – Matthies v. Commissioner, 134 T.C. No. 6 (February 22, 2010)

At issue in Matthies was whether taxable income resulted from the sale of a second-to-die life insurance policy by the profit-sharing plan of the taxpayers' wholly owned subchapter S corporation to the taxpayers.

In October of 1998, the taxpayers incorporated their subchapter S corporation and formed its profit-sharing plan. In January of 1999. the plan purchased an $80 million second-to-die life insurance policy on the lives of the taxpayers. During 1999 and 2000, the taxpayers transferred over $2.5 million from...