United States: Wealth Management Update - September 2015

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 2.2%, which is the same as last month. The September 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 1.77%, which is a 0.05% decrease from the August rate.

The relatively low § 7520 rate and AFR continue to present potentially rewarding opportunities to fund GRATs in September with depressed assets that are expected 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 0.54% for loans with a term of 3 years or less, 1.77% for loans with a term between 3 and 9 years and 2.64% 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 1.77%, the child will be able to keep any returns over 1.77%. These same rates are used in connection with sales to defective grantor trusts.

Disregarded Entities Owned by Nonresidents Will Be Disregarded for New York Estate Tax Purposes

In Advisory Opinion TSB-A-15(1)(M) (May 29, 2015), the New York State Department of Taxation and Finance confirmed that it would disregard a single-member LLC owning a condominium in New York if the LLC were a disregarded entity for Federal income tax purposes. New York imposes estate tax on New York situs property owned by nonresidents, which includes real property and tangible personal property located in New York. New York does not impose estate tax on intangible property owned by nonresidents. Intangible property generally includes membership interests in an LLC. In this case, however, the Department made clear that it would treat the decedent's interest in a single-member LLC that owned a condominium as real property for estate tax purposes.

The Department's ruling relied on the fact that the single-member LLC is a disregarded entity for income tax purposes. If the taxpayer would elect for the LLC to be taxed as a corporation, the LLC interests would be intangible property of a nonresident and, therefore, not subject to New York estate tax. The Department issued a similar ruling in Advisory Opinion TSB-A-08(1)M (October 24, 2008), in which it concluded that an interest in a single-member LLC electing to be treated as a corporation under the check- the-box rules, as well as an interest in an S Corporation, would be treated as intangible property. The 2008 Advisory Opinion goes further in reminding the taxpayer that the S Corporation still would have to pass the "business purpose" test to be recognized; i.e., the entity would have to serve a purpose related to a business activity.

While the recent ruling confirms a position already established by the New York State Department of Taxation and Finance, it also serves as a reminder to practitioners regarding the complexity involved in planning for nonresidents who own property in New York. Advisors must consider both the income tax and estate tax consequences of transferring property into certain types of entities, as well as nontax advantages such as privacy, protection from liability and eliminating the need for ancillary probate in New York.

New York City's New Reporting Requirements for Partnerships and LLCs Acquiring Real Estate

As of May 18, 2015, partnerships and multimember LLCs that acquire real estate in New York City are required to disclose the name and tax ID number of each general partner or LLC member to the NYC Department of Finance. The stated purposes of the new rules are to improve tax reporting and assessment, as well as to make it more difficult for criminals to hide purchases through shell companies.

When real estate in New York City changes hands, the City requires both the grantor and the grantee (i.e., the seller and the buyer) of any interest in real property to file a joint Real Property Transfer Tax Return (Form NYC-RPT). For all boroughs except Staten Island, Form NYC-RPT can be filed online through the Automated City Register Information System ("ACRIS"). The ACRIS database contains property records from all five boroughs (including Staten Island) from 1966 to present and can be accessed and searched by the general public via a Web site maintained by the City.

Effective May 18, 2015, Form NYC-RPT was revised to include two new grantor-grantee types – "Single Member LLC" and "Multiple Member LLC." Grantors and grantees who are partnerships or multiple-member LLCs must provide the name and tax ID number of each general partner or member. The Department of Finance claims that the information will be kept confidential and used for tax administration purposes only.

While it is still possible to acquire New York City real estate through entities that are not fully transparent, the new rules may affect ownership structures used by individuals and their families who are hesitant to disclose certain personal information on Form NYC-RPT.

District Court Dismisses Policyholders' Lawsuit against Carrier Engaged in "Shadow Insurance" Transactions

In Ross v. AXA Equitable Life Insurance Co., No. 14-CV-2904 (SDNY, July 21, 2015), the District Court for the Southern District of New York denied a motion for class certification and dismissed a claim brought by two New York residents alleging that their life insurance carrier engaged in "shadow insurance" transactions to make the company appear financially stronger. The court found that the plaintiffs were unable to show actual injury resulting from the disclosures provided by their insurance carrier.

State regulators require insurance companies to maintain a certain level of assets that can be used to satisfy claims made by policyholders. In order to mitigate risk and reduce assets required to be held, many insurers engage in "reinsurance" transactions by which a primary insurer pays a premium to a secondary insurer in exchange for assuming risk associated with policies written by the primary insurer. If a reinsurance transaction meets certain requirements, state regulators will allow a primary insurer to claim "reserve credits" and hold fewer assets in reserve. Some primary insurers will purchase reinsurance from affiliated "captive" insurance companies based in jurisdictions with less strict regulatory requirements. In some instances, the reinsurance will be guaranteed by the parent company of the primary insurer. These "parental guarantees" may allow companies to obtain reserve credits without transferring risk to unaffiliated third parties.

The plaintiffs in Ross alleged that their carrier failed to disclose adequately guarantees and indemnifications received through affiliates. These inadequate disclosures induced them to purchase life insurance from a carrier with fewer reserves and less-sound financial backing than other carriers who may not have engaged in shadow transactions.

The court found that the plaintiffs were unable to show that they actually suffered as a result of the disclosures made by the primary insurers. The plaintiffs did not claim that they relied on or were influenced by the carrier's financial disclosures or that they would not have purchased their policies had the shadow transactions been disclosed. The possibility that harm could occur if, as a result of shadow transactions, the carrier became unable to pay the plaintiffs' claims was too speculative to warrant payment of damages.

The ruling serves as a reminder that those who buy life insurance (and their fiduciaries and advisors) should review carefully disclosures regarding the insurance carrier's financial health.

Consistent Basis Reporting under New Internal Revenue Code Sections 1014(f) and 6035

On July 31, 2015, the president signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (commonly referred to as the "Highway Bill") , which added two provisions to the Internal Revenue Code aimed at requiring the beneficiaries of estates to use the Federal estate tax value of assets received as their basis for income tax purposes. The new "consistent basis reporting" rules were originally effective with respect to all estates filing estate tax returns after July 31, 2015. The new rules require that within 30 days of filing Form 706, the executors must provide each beneficiary with a statement showing the estate tax value of all property to be received by the beneficiary and file a copy of each statement with the IRS. On August 21, 2015, the IRS released Notice 2015-57, which extends the deadline for providing these statements until February 29, 2016.

The new Section 1014(f) to the code, states the general rule that a beneficiary's basis in the property received from a decedent must be consistent with the "final value" of the property for estate tax purposes. The final value can mean the value reported on the estate tax return, the value as finally determined on audit (either by court or by the IRS) or, if there has been no final determination, the value shown on a statement provided by the executor under new Section 6035(a). A taxpayer who commits "inconsistent estate basis reporting" (i.e., who incorrectly reports basis as being higher than the final value) is subject to a 20% penalty on any resulting underpayment of tax under new Section 6662(b)(8) and 6662(k). This specific penalty will not apply to assets that did not increase estate tax liability, such as assets that qualified for the charitable or marital estate tax deduction or assets received from an estate not required to file From 706.

The new Section 6035(a) requires that, within 30 days of filing an estate tax return (or 30 days of the due date in the case of a late return) the executor of any estate required to file Form 706 must send a statement to each beneficiary stating the value of the assets that beneficiary will receive. Copies of the statements must be filed with the IRS. Failure to file a statement (which is considered an "information return") with the IRS could result in a $250 penalty under Section 6721. If any values are later adjusted, supplemental statements need to be sent with 30 days after the adjustment is made.

The new requirements present a host of practical issues for executors and their advisors. Notice 2015-57 notes that the IRS expects to issue additional guidance to assist with compliance. Presumably, the guidance will include instructions for preparing and filing the required notices to beneficiaries and perhaps even contain model forms. A more serious issue for executors will be determining which assets pass to which beneficiaries within 30 days of filing Form 706. Administration of complex estates can take several years, and decisions regarding which assets to use to fund various legacies and bequests often require careful consideration. If the new law effectively requires that all those decision be made within 16 months of death, executors will have their work cut out for them.

Wealth Management Update - September 2015

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions