Wealth Management Update - May 2012

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 1.6% (up slightly from the 1.4% rate in January, February, March and April). 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 1.30% (up slightly from the April rate of 1.15%). 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 decline in the financial and real estate markets presents a potentially rewarding opportunity to fund GRATs in May 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 0.28% for loans with a term of 3 years or less, 1.30% for loans with a term of 9 years or less and 2.89% 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 1.30%, the child will be able to keep any returns over 1.30%. These same rates are used in connection with sales to defective grantor trusts.

Wandry v. Commissioner, T.C. Memo 2012-88 (3/26/2012)

In Wandry, a groundbreaking Tax Court case, the court approved a donor's use of a defined value clause (a clause where the donee is entitled to a fixed dollar amount worth of property) which, upon an IRS revaluation of LLC membership interests, resulted in a reallocation of LLC interests to the original donor. Wandry is the latest in a series of recent cases that have approved of defined value clauses. What makes Wandry unique is that it is the first case to approve of a defined value clause where there was no charitable donee to receive part of the property.

The donors, Albert and Joanne Wandry, formed Norseman Capital, LLC (the "LLC") with their children in 2001. The family members contributed cash and marketable securities to the LLC. In 2004, the donors gifted specific dollar amounts of membership interests in the LLC. They gave $261,000 of interests to each of their four children and $11,000 of interests to each of their five grandchildren. The assignments provided that the donors were transferring a sufficient number of units in the LLC so that the fair market value of the units for federal gift tax purposes would be $261,000 per child and $11,000 per grandchild. The assignments provided further that the donors intended to have a good faith determination of the value of the units made by an independent appraiser, and that if the IRS challenged such valuation and a final determination of a different value were made by the IRS or a court of law, the number of gifted units would be adjusted accordingly, so that the value of the number of units gifted to the children and grandchildren equaled the amounts set forth above.

The donors then had an appraisal completed by an independent appraiser, which the donors' accountant used...