Wealth Management Update (December 2015)

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 the same as November's rate. 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 having a duration of 3-9 years (the mid-term rate, compounded annually) is 1.68%, up from 1.59% in November.

The relatively low § 7520 rate and AFRs continue to present potentially rewarding opportunities to fund GRATs in December with depressed assets that are expected to perform better in the coming years.

The AFRs (based on annual compounding) used in connection with intra-family loans are 0.56% for loans with a term of 3 years or less, 1.68% for loans with a term between 3 and 9 years, and 2.61% 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 1.68%, the child will be able to keep any returns over 1.68%. These same rates are used in connection with sales to defective grantor trusts.

New York State Issues Guidance Regarding the Treatment of Certain Deductions for New York Estate Tax Purposes for Decedents Dying after April 1, 2014 (TSB-M-15(4)(M))

On October 27th, New York State issued guidance regarding the treatment of certain deductions for New York State estate tax purposes. The rules imposed by this new guidance apply to resident and nonresident decedents dying on or after April 1, 2014. If the rules result in a change in the allowable deductions for an estate of such a decedent and that estate has already filed its New York estate tax return, an amended return must be filed.

The guidance divides deductions into three categories: (1) Deductions that relate directly to real and tangible property, such as a charitable deduction, a marital deduction or a deduction for mortgages; (2) Deductions that relate directly to intangible property, such as a charitable deduction, a marital deduction or a deduction for broker fees; and (3) Deductions that indirectly relate to real, tangible or intangible property, such as executor commissions, accounting fees, attorney's fees, funeral expenses or debts of the decedent. This third type also is referred to as "indirect expenses" here and in the...