Wealth Management Update - December 2013

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 2.0%, which is unchanged from last month. The December 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 1.65%, which is a decrease from the November rate. 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 with financial and real estate markets that remain undervalued presents a potentially rewarding opportunity to fund GRATs in December with depressed assets you expect to perform better in the coming years.

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 0.25% for loans with a term of 3 years or less, 1.65% for loans with a term of 9 years or less, and 3.32% 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 1.65%, the child will be able to keep any returns over 1.65%. These same rates are used in connection with sales to defective grantor trusts.

Delaware Supreme Court Offers Guidance on When Delaware Law Applies to a Trust Originally Subject to Another State's Law

In a series of three opinions, all relating to trusts created for the benefit of members of the Peierls Family, the Delaware Supreme Court has offered clarification as to when Delaware law applies to a trust that previously was administered in another state.

http://courts.delaware.gov/opinions/download.aspx?ID=195780

http://courts.delaware.gov/opinions/download.aspx?ID=195790

http://courts.delaware.gov/opinions/download.aspx?ID=195800

Several of the trusts at issue included provisions directing that the validity and effect of the trusts was to be determined by the laws of either New York or New Jersey (depending on the particular trust). The trusts allowed for the appointment of successor Trustees without any geographic restriction (i.e., the successor Trustee could be domiciled in any state). None of the Trustees of the trusts were domiciled in Delaware.

The beneficiaries petitioned the Delaware Court of Chancery to: (1) allow the current Trustees of each trust to resign; (2) appoint a Delaware trust company as sole Trustee; (3) reform each trust to allow a sole Trustee to act; and (4) reform each trust by converting them into "directed trusts," with a Trust Protector and an Investment Advisor.

The Delaware Court of Chancery has the power to reform a trust under Court of Chancery Rules 100 through...