Wealth Management Update - December 2012

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

The December § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.2%, which is a slight increase from last month'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 9-year duration (the mid-term rate, compounded annually) is 0.95%, which is up slightly from last month's 0.89% but still very 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 a financial and real estate market that remains undervalued presents a potentially rewarding opportunity to fund GRATs in December with depressed assets that 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 0.24% for loans with a term of 3 years or less, 0.95% for loans with a term of 9 years or less and 2.4% for loans with a term of longer than 9 years. Thus, for example, if a 9-year loan is made to a child who invests the funds and obtains a return in excess of 0.95%, the child will be able to keep any returns in excess of that interest rate.

December, possibly the final month with an estate and generation-skipping transfer tax exemption of $5,120,000, continues to be ripe for sophisticated planning techniques.

Estate of Thouron v. United States, E.D. Pa., No. 2:11-cs-04058 (11/08/2012)

The U.S. District Court for the District of Pennsylvania held that relying on the advice of a tax attorney was not reasonable cause for the late payment of estate taxes.

The decedent's estate sought a refund for a penalty imposed and collected by the IRS for late payment of an estate tax. The decedent died at the age of 99. The decedent appointed a friend as personal representative of the estate, who, upon the decedent's death, hired an attorney to provide legal services regarding tax compliance of the estate. The estate was required to file a Form 706 nine months after the decedent's death. The personal representative, relying on his attorney's advice, filed an Application for Extension of Time to file a Return and/or Pay U.S. Estate Taxes (Form 4768). Unfortunately, the estate requested only an extension of the time to file the return and failed to file a request for an extension of time to pay the estate tax.

The personal representative claimed that his attorney advised him that the form for an extension of time to pay the tax was not due until he actually filed the tax return. The attorney told him that since the bulk of the estate consisted of illiquid assets, the tax due would be deferred under section 6166. His attorney also said that even if they did not qualify under section 6166, there would be no penalty imposed. Six months after the initial nine-month deadline, the estate filed Form 706, and, on the same day and for the first time, submitted a Form 4768 for an extension of time to pay the estate tax. The IRS denied the estate's request for additional time to pay the tax as untimely and hit...