Wealth Management Update - February 2017

Author:Mr Albert Gortz, George D. Karibjanian, David Pratt, Mitchell M. Gaswirth, Andrew M. Katzenstein, Henry J. Leibowitz, Vanessa L. Maczko, Lisa M. Stern, Philip M. Susswein, Jay D. Waxenberg and Scott A. Bowman
Profession:Proskauer Rose LLP

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

The February § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.6%, up 0.2% from January. The February 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 2.10%, up from 1.97% in January.

The relatively low § 7520 rate and AFR continue to present potentially rewarding opportunities to fund GRATs in February 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 1.04% for loans with a term of 3 years or less, 2.10% for loans with a term between 3 and 9 years, and 2.81% 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 2.10%, the child will be able to keep any returns over 2.10%. These same rates are used in connection with sales to defective grantor trusts.

IRS Grants Retroactive Effect to a Court Reformation of Several GRATs (P.L.R. 201652002 (December 23, 2016))

The taxpayer retained an attorney to draft several GRATs. The first page of each trust provided "WHEREAS, the Grantor wishes to establish an irrevocable Grantor Retained Annuity Trust, the retained interest of which is intended to constitute a qualified interest within the meaning of Section 2702(b)(1) of the Internal Revenue Code." In drafting each trust agreement, however, the drafting attorney failed to include language prohibiting the trustee from issuing a note or other debt instrument in satisfaction of the annuity obligation, as required by Treas. Reg. § 25.2702-3(d)(6).

The taxpayer retained a new attorney who discovered the error and filed an action in court to seek reformation of the trusts pursuant to a state statute that allows a court to "modify" a trust in order to carry out the settlor's tax objectives. The court issued a ruling reforming the trusts to correct the apparent scrivener's error retroactive to the date each of the trusts were established.

The taxpayer then requested a ruling from the IRS that, as a result of the judicial reformation of the GRATs, the taxpayer's interest in each trust was a "qualified interest" under Treas. Reg. §§ 25.2702-2 and 25.2702-3. The IRS found that the result of the judicial reformation of the GRATs to correct the scrivener's error was that the taxpayer's interest in the trusts was a "qualified interest," effective as of the date each trust was created.

The IRS Revokes a Prior Private Letter Ruling Holding That A Delaware Incomplete Non-Grantor Gift Trust ("DING") Was a Non-Grantor Trust (P.L.R. 201642019 (October 14, 2016))


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