United States: Wealth Management Update

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

The September § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.0%, which is the same as the August rate and an increase from July's rate of 1.2%. 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 midterm rate, compounded annually) is 1.66%, which is up from the August rate of 1.63% and the July rate of 1.22%. 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 August 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 in September are 0.25% for loans with a term of 3 years or less, 1.66% for loans with a term of 9 years or less, and 3.28% 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 1.66%, the child will be able to keep any returns over 1.66%. These same rates are used in connection with sales to defective grantor trusts.

United States v. Windsor and Rev. Rul. 2013-17 and I.R.S. News Release IR-2013-72

On August 29, 2013, the Internal Revenue Service (the "Service") issued Revenue Ruling  2013-17 and I.R.S. News Release IR-2013-72 in response to the United States Supreme Court's (the "Supreme Court") decision in United States v. Windsor, 570 U.S. --- (2013), which determined that Sec. 3 of 1996's "Defense of Marriage Act" ("DOMA") was unconstitutional as a violation of the liberties guaranteed to same-sex married persons under the Fifth Amendment to the Constitution of the United States.

Rev. Rul. 2013-17

Rev. Rul. 2013-17 consists of two distinct conclusions. The first conclusion is that the Code must be read in a gender-neutral manner with respect to "marriage" and "spouse" so that that the Code provisions for "marriage" and "spouse" include same-sex spouses.  In retrospect, this conclusion was probably already assumed by practitioners but clarifies existing law by applying Windsor to the Code.  If it is unconstitutional under Windsor to classify marriages based on sexual preference, it is logical to presume that any terms under the Code that could be interpreted as relating to a sexual preference distinction with respect to marriage must be interpreted in a neutral way. 

The second conclusion resolved a much-debated issue within the tax practitioner community in that a same-sex married couple's state of residency is irrelevant for purposes of Federal recognition of the marriage so long as the individuals are lawfully married in a domestic or foreign jurisdiction whose laws authorize same-sex marriage.  Therefore, if a same-sex couple marries in New York and moves to Florida (which does not recognize same-sex marriage), the couple will be considered to be married for all purposes of the Code even if such marriage was the result of "forum shopping" for a jurisdiction that would marry the same-sex couple. 

At the end of the ruling, the Service noted that for Federal tax purposes, the term "marriage" does not include registered domestic partnerships, civil unions, or other similar formal relationships recognized under state law that are not denominated as a marriage under that state's law, and the terms "spouse," "husband and wife," "husband," and "wife" do not include individuals who have entered into such a formal relationship.

I.R.S. News Release IR-2013-72

In Notice IR-2013-72, the Service provides guidance for same-sex married couples for amending prior returns, providing that such authority is voluntary and not mandatory, and that such ability only extends to currently "open" taxable years. With respect to the open tax years, the Service gives credence to the proposition that an unconstitutional determination renders a statute as inoperative as if it had never been passed and never existed so as to be void ab initio.  Such a determination would allow a taxpayer to file amended returns for such prior years based on the law as it now exists as to such time period, i.e., as if the applicable statute were not then in existence.  This is to be contrasted by the repeal of a statute without retroactive effect – in that instance, the statute was valid for such prior years so the ability to claim a refund in the absence of such statute should not be present.

However, what if the tax year is closed under the applicable statute of limitations?  Should the unconstitutionality cause the year to be re-opened? The Service was silent on this position, which is, from the Service's perspective, the proper course of action. The law is likely on the side of the Service in that, courtesy of the ability to file for a protective claim for refund, the Code provides an adequate post-deprivation remedy and therefore the unconstitutionality of § 3 of DOMA is not sufficient to overcome the applicable statute of limitations. ("DOMA"), which defined marriage for purposes of federal law as a marriage between a man and a woman, is unconstitutional and that the concept of defining "marriage" is the domain of the States.

The Supreme Court's ruling provides same-sex spouses the same recognition and benefits under federal law as opposite-sex spouses. In the estate planning arena, such benefits include, but are not limited to: (1) filing joint income tax returns; (2) the unlimited marital deduction for gift and estate tax purposes; (3) splitting of inter-vivos gifts; (4) electing portability of the deceased spouse's unused applicable exclusion amount; (5) naming a spouse as the beneficiary under a qualified retirement account and allowing the surviving spouse to "roll over" the account into his or her own account, thereby potentially extending the ultimate payout of the account; (6) simplifying the basis and contribution rules with respect to jointly owned property; (7) eliminating adverse tax consequences for the transfer of property pursuant to a marriage settlement agreement; and (8) granting certain social security, Medicare and Medicaid benefits.

However, a debate has ensued regarding whether these new benefits are available to same-sex spouses who married in a jurisdiction that recognizes same-sex marriage but reside in a jurisdiction that does not recognize same-sex marriage or available only to same-sex spouses who reside in a jurisdiction that recognizes same-sex marriage. Arguments have been made for each position, and estate planning practitioners will need guidance from the IRS and the Treasury to resolve the issue.

United Statesv. Tyler, --- F.3d --- (3rd Cir. 2013)

The Third Circuit Court of Appeals held that co-executors of a deceased taxpayer's estate are personally liable for the cash proceeds of the taxpayer's 1/2 interest in real property that the co-executors sold without applying the proceeds to the taxpayer's federal tax debt.

The IRS assessed the taxpayer in 2002 for income tax from prior years. The taxpayer and his wife owned their residence as tenants by the entireties, but in 2003, the taxpayer transferred his interest in the residence to his wife for $1, which severed the tenancy by the entireties. The IRS filed a notice of federal tax lien on the property in 2004. The taxpayer died in 2006 and his wife died shortly after. The Tyler court affirmed that the lien attached to the property when the taxpayer was assessed and remained with the property when it became part of the estate of the taxpayer's wife because the tenancy by the entireties was severed and because she did not pay "adequate and full consideration" for her interest under § 6323(h)(6). The court acknowledged that the lien would not have survived the taxpayer's death had the tenancy by the entireties not been severed.

The couple's son (the sole heir and a co-executor) sold the residence in 2008 and lost the proceeds investing in the stock market. The Tyler court affirmed that the co-executors were required under the federal insolvency statute, 31 U.S.C. § 3713, to pay the U.S. government "first when ... the estate of a deceased debtor ... is not enough to pay all the debts of the debtor." Therefore, the co-executors were personally liable for the cash proceeds from the sale of the deceased taxpayer's property that was encumbered by a federal tax lien.

CLAT Assets Not Includible in Settlor's Gross Estate – PLR201323007

The IRS privately ruled that the taxpayer's transfer to a charitable lead annuity trust ("CLAT") that will pay the annuity to a private foundation in which the taxpayer is a director was a completed gift for gift tax purposes, the gift qualifies for the gift tax charitable deduction and none of the CLAT's assets will be included in the taxpayer's gross estate.

The taxpayer created a CLAT of which he could not serve as the trustee. In addition, the beneficiary of the CLAT income interest was a private foundation established by the taxpayer and his wife (the "Foundation") of which the taxpayer and his wife and children were directors. The Foundation's bylaws provided that (1) a director who establishes a charitable trust of which the Foundation is a beneficiary is prohibited from involvement in and decisions of matters concerning the receipt, investment, grant or distribution of the funds received by the Foundation from such charitable trust and (2) any funds received from a charitable trust be segregated into a separate and dedicated account for such funds to clearly trace the funds into and out of the separate account.

The IRS ruled that the taxpayer's transfer to the CLAT was a completed gift for gift tax purposes and qualifies for the gift tax charitable deduction even though the taxpayer is a Foundation director.  This was allowed because the taxpayer is not permitted to vote on matters relating to disbursement or grants of funds received from the Trust and any funds received by the Foundation from the CLAT are segregated into a separate account. For similar reasons, the IRS ruled that the taxpayer retains no interest or reversion in the CLAT and, therefore, the CLAT's assets will not be included in the taxpayer's gross estate.

Graev v. Comm'r, 140 T.C. 17 (2013)

The Tax Court concluded that a married couple was not entitled to a charitable contribution for their gift of cash and a conservation easement to an architectural trust because the donation was improperly conditioned on whether the IRS would allow their claimed deduction.

A taxpayer gifted a facade conservation easement and cash to the National Architectural Trust ("NAT"). Prior to the contribution, the taxpayer expressed concern to NAT that, based on a recent IRS Notice, the IRS intended to crack down on improper charitable contribution deductions for transfers of easements on real property to charitable organizations. NAT replied that it was NAT's standard policy "to refund a cash contribution to the extent the IRS disallowed the donor's deduction for the related easement." The taxpayer asked NAT to memorialize NAT's assurance in a "side letter" separate from the easement application which stated that should the IRS disallow the deductions in their entirety, NAT would refund the taxpayer's cash contribution and join with the taxpayer to remove the facade conservation easement from the property's title. Furthermore, the recorded deed reserved NAT's power to do so.

The IRS issued the taxpayer and his wife a notice of deficiency disallowing the cash and non-cash charitable deductions because the contributions were "made subject to subsequent event(s)." The tax court upheld the IRS's findings and concluded (based on existing case law and the taxpayer's awareness that the IRS was giving extra scrutiny to similar deductions) that at the date of the taxpayer's contribution, the possibility that the IRS would disallow the deduction and that NAT would return the cash to the taxpayer and remove the easement was not "so remote as to be negligible." The Graev court stated, "A substantial risk obviously arose from the IRS's then-announced intention to scrutinize charitable contribution deductions for facade easement contributions, and that risk is evident from Mr. Graev's insistence on NAT's issuing the side letter."

Belk v. Comm'r, T.C. Memo 2013-154 (2013)

The Tax Court denied a motion for reconsideration of its previous denial of an income tax deduction for a contribution of a conservation easement, where the donor and the charity agreed that the donor could substitute other assets for the contributed property, because the donor failed to donate an interest in real property that was subject to a use restriction granted in perpetuity.

In 1994, the taxpayers transferred their 410 acre farm to the taxpayers' LLC which developed the property as a residential community and golf course. In 2004, the LLC executed a conservation easement agreement with the Smoky Mountain National Land Trust (the "Land Trust") for the land where the golf course was located. The conservation easement provided that the taxpayers and the Land Trust could change the property that is subject to the easement.

Under § 170(h), to be a qualified conservation contribution, the contribution must be of a "qualified real property interest," which is defined as a "restriction (granted in perpetuity) on the use which may be made of the real property." The Belk court rejected the notion of a "floating easement" and found that "section 170(h)(2)(C) requires that taxpayers donate an interest in an 'identifiable, specific piece of real property.'" The Belk court determined that it was the intent of the parties to permit substitutions because the conservation easement agreement permitted substitutions, and, therefore, the taxpayers did not agree to restrict their use of the donated property in perpetuity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.