Wealth Management Update - May 2013

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.

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

The May § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.2%, which is a slight decrease from April's rate of 1.4%. 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 a 9-year duration (the mid-term rate, compounded annually) is 1.00%, which is down slightly from the April rate of 1.09%, and still relatively 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 financial and real estate markets which remain undervalued presents a potentially rewarding opportunity to fund GRATs in May with depressed assets 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 0.20% for loans with a term of 3 years or less, 1.00% for loans with a term of 9 years or less and 2.60% 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 1.00%, the child will be able to keep any returns over 1.00%. These same rates are used in connection with sales to defective grantor trusts.

Favorable "DING Trust" Rulings - PLRs 201310002 - 201310006

In five related rulings, the IRS issued favorable holdings addressing the income and gift tax consequences of so-called "DING trusts." The acronym stands for "Delaware Incomplete Non-Grantor" trusts, but the trust does not need to be established in Delaware. In fact, the trusts at issue in the rulings are believed to be Nevada trusts.

DING trusts primarily are used to avoid state income tax by having the trust created in a jurisdiction that will not tax the accumulated earnings of a nongrantor trust. At the same time, the Grantor's initial contribution of property to the trust is not deemed to be a completed gift subject to federal gift tax.

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