United States: Wealth Management Update - November 2015

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

The November § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.0%, the same as October. The November 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 1.59%, down from 1.67% in October.

The relatively low §7520 rate and AFR continue to present potentially rewarding opportunities to fund GRATs in November 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 0.49% for loans with a term of 3 years or less, 1.59% for loans with a term between 3 and 9 years, and 2.79% 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 1.59%, the child will be able to keep any returns over 1.59%. These same rates are used in connection with sales to defective grantor trusts.

2016 Annual Gift Exclusion

For 2016, the first $14,000 of gifts a taxpayer makes to any particular individual are not subject to gift tax. This "annual gift exclusion" amount is unchanged from 2015.

2016 Gift and Estate Tax Exemption Amount

For 2016, each taxpayer's unified gift and estate tax exemption amount is $5,450,000, a $20,000 increase from last year's exemption amount of $5,430,000.

This amount represents the maximum aggregate amount that a taxpayer may gift during his or her lifetime or bequeath at his or her death without the imposition of any federal gift or estate taxes.

Tax Court Upholds Valuation Discount on "Net Net Gift" (Steinberg v. Commissioner, 145 T.C. No. 7 (September 16, 2015))

Plaintiff, Jean Steinberg, was the beneficiary of a marital trust created under the Will of her deceased husband. The trust was a "QTIP" trust (short for "Qualified Terminable interest Property"), meaning the assets used to fund the trust were not subject to federal estate tax at the death of Ms. Steinberg's husband, but will be subject to federal estate tax at her death. Under the terms of the QTIP, at her death the remaining trust assets were to be distributed to Ms. Steinberg's four daughters.

In 2007, when the assets in the marital trust had a value of approximately $123 million, Ms. Steinberg entered into a written agreement with her daughters, whereby she agreed to terminate the trust and distribute approximately $109 million of trust principal outright to her daughters. Even though these distributions were subject to federal gift tax, they had the potential to minimize the family's total transfer taxes since (a) New York would impose a state estate tax on the trust's assets at Ms. Steinberg's death but does not impose a gift tax on lifetime transfers and (b) the cash used to pay the gift tax is removed from Ms. Steinberg's estate and will not be subject to estate tax at her death.

In exchange for the early termination of the trust, Ms. Steinberg's daughters agreed to use the funds they received, in part, to pay Ms. Steinberg's $32 million federal gift tax liability with respect to the transfers.

In addition, they agreed to pay any estate taxes at Ms. Steinberg's death attributable to the gift tax payable on the current transfers. Estate tax could be due, since Section 2035(b) of the Code provides that any gift tax paid by a decedent within three years before her death is included in the donor's estate (although the property actually gifted is not). In Ms. Steinberg's case, if she survived for at least three years after the date of the gift, no estate taxes would be imposed at all with respect to the transfers to her daughters. However, if she died within that three-year period her estate would owe approximately $17 million of additional estate tax (i.e., the $32 million in gift tax previously paid, multiplied by a maximum aggregated federal and state estate tax rate of 53.8%, assuming Ms. Steinberg were to have died in 2008).

Because the daughters took the transferred assets subject to these two obligations, the gifts are referred to as a "net net gifts," and the reportable value of the gifts must be reduced accordingly.

Ms. Steinberg filed a 2007 federal gift tax return reporting aggregate gifts to her daughters of approximately $71.5 million, representing (1) the $109 million of assets actually transferred, (2) reduced by $32 million of gift tax paid by daughters, then
(3) further reduced by $5.8 million, representing a professional appraiser's determination of the value of the daughters' Section 2035(b) payment obligation (in other words, the value to Ms. Steinberg of her daughters' promise to pay any estate tax attributable to the transfers if Ms. Steinberg died within three years).

The IRS challenged the reduction of the gift value attributable to the 2503(b) obligation, rejecting the technical methodology used by Ms. Steinberg's appraiser. However, the IRS did not engage its own appraiser or present an alternative appraisal to the court.

The court rejected the arguments of the IRS, concluding that the obligations taken on by the daughters in exchange for the gift should be valued just as the obligations would be in the context of an arm's-length transaction between a hypothetical willing buyer and willing seller, noting the lengthy negotiations involved in formulating the agreement between Ms. Steinberg and her daughters, and that each side was represented by separate counsel.  

This case confirms that a valuation discount should apply where a donee assumes the potential liability of estate tax under 2503(b), provided that the donor and the donee enter into a bona fide negotiation as to the terms under which the gift will be made, and that a professional appraiser is engaged to value the donee's obligation. Anyone considering making a substantial lifetime gift that will give rise to gift tax should thus consider the advantages of structuring the transfer as a "net net gift."

IRS Memorandum Illustrates Importance of Adequately Describing and Valuing Reportable Gifts (Legal Advice Issued by Field Attorneys 201522001F (March 13, 2015))

Under Section 6501 of the Code, if a taxpayer files a gift tax return that adequately describes a gift and the manner in which it was valued, the IRS will generally only have a three-year statute of limitations period within which to challenge the reported value of the gift.

In a legal memorandum in September, an IRS attorney analyzed whether certain gifts reported by a taxpayer on a gift tax return had met the adequate disclosure requirements under Section 6501, as part of a determination of whether the IRS could challenge the value of the gifts after the three-year limitations period had passed.

Taxpayer gave his daughter minority interests in two partnerships that held farmland. Taxpayer apparently had the farmland professionally appraised, and also may have obtained some sort of appraisal of the partnerships, for purposes of determining the reportable value of the gifted interests.

However, neither the farmland appraisal nor any partnership appraisals were attached to the gift tax return reporting the gifts. Instead, a one-paragraph statement was attached to the return, which stated that the farmland had been independently appraised by a certified appraiser and that a valuation discount was being applied for lack of marketability and because only minority partnership interests were being transferred. The percentage discount was presented as an aggregate number, with no indication of what portion thereof was attributable to the lack of marketability and what portion was attributable to a minority interest.

Both partnerships were referred to on the return by abbreviated names, rather than their full legal names, and the names also omitted any sort of designation indicating what type of entity was involved (i.e., "L.P." or "L.L.P."). The return showed the correct nine-digit federal tax identification number ("EIN") for one partnership, but for the other partnership provided only eight of the nine digits of the EIN.

The IRS memorandum first analyzes whether the return provided an adequate description of the transferred interests. For the partnership for which a complete EIN was provided, the IRS attorney concluded that the gifted interest likely was adequately described, since the IRS could use the EIN to search its database for the correct legal name of the partnership. However, the IRS had no means of identifying the other partnership, for which taxpayer had provided neither the correct name nor the correct EIN.

The memorandum then tackles the issue of whether the return as filed provided a sufficiently detailed description of the methods used to determine the reportable fair market value of the gifted partnership interests. Here the return clearly fails with respect to both partnerships, since only a conclusory statement of value was provided, without any explanation of the method used to determine the value of the farmland or any explanation of how the valuation discounts were calculated (or any breakdown of what the specific discount percentages were for the different discount types). The memorandum concludes that since there was no adequate description of the valuation method for either partnership, the filing of the gift tax return did not commence the statute of limitations period.

The memorandum is a reminder of the importance of providing detailed descriptions of any gifted interests on a gift tax return. If there is no readily available market value for the gifted interest, a professional appraisal generally must be attached to the return. If the appraisal relies on a separate appraisal of an underlying asset (for instance, the farmland held in the taxpayer's partnerships), that underlying appraisal also must be attached. The correct names, addresses and taxpayer identification numbers of all donees must be reported in detail, along with a description of the donee's relationship to the donor. Failing these disclosure requirements in any particular opens the door for the IRS to argue that no statute of limitation applies to the reported gifts.

Massachusetts Appeals Court Includes Irrevocable Trust for Husband in Division of Assets in Divorce (Pfannenstiehl v. Pfannenstiehl, Nos. 13-P-906, 13-P-686 & 13-P-1385 (Mass. App. Ct. Aug. 27, 2015))

In most states, including New York, the general rule is that when dividing property between divorcing spouses, any irrevocable trusts for the benefit of a spouse (unless created by the spouse for his or her own benefit) are excluded from consideration. However, in some jurisdictions, such as Massachusetts, courts can take these trusts into account when determining how marital assets should be divided.

In Pfannenstiehl, the Massachusetts Appeals Court upheld the Probate and Family Court's determination that a portion of an irrevocable trust of which the husband was a beneficiary should be included in the marital estate. The trust was a "sprinkle" trust created by the husband's father for the benefit of all of the father's descendants. The Trustees were empowered to distribute income and principal to any descendant (even to the exclusion of the other beneficiaries) as they deemed advisable to provide for his or her comfortable support, health, maintenance, welfare and education. The Trustees had been using this power to make monthly distributions to the husband (and his siblings), although the distributions to the husband immediately stopped once an action for divorce was filed.

Because the trust was subject to an "ascertainable," rather than a fully discretionary, distribution standard, the Probate and Family Court concluded that the husband had a present enforceable right to distributions from the trust. Because the husband could take the Trustees to court to compel distributions for his health, maintenance and support, the value of the husband's interest in the trust could be quantified in terms of a dollar amount (and thus factored into the division of marital assets). The history of monthly distributions to the husband also helped to quantify what amounts would be necessary for his support.

If the trust had instead been fully discretionary (i.e., if the Trustees had been empowered to make distributions to any beneficiary for any reason), likely the trust would not have been included in the marital estate, since the husband's interest in the trust would be impossible to value.

At the time of divorce, the total value of the trust was approximately $25 million and the trust had eleven permissible beneficiaries, consisting of the Settlor's children and grandchildren. The Probate and Family Court determined, therefore, that the husband held a one-eleventh interest in the trust, and that the wife was entitled to half of that amount. The court did not have the authority to compel the Trustees to make distributions to the husband. However, it did issue an order directing the husband to make twenty-four monthly payments to wife of approximately $50,000 each, putting the burden on the husband to come up with the necessary funds.

The husband requested, by letter, that the Trustees make distributions to him so he could make the court-ordered monthly payments. The Trustees refused, likely concluding that the Settlor's intent was for trust assets to benefit his descendants, not the former spouses of his descendants. The lower court then found the husband in contempt for his failure to make the monthly payments (concluding that, taking the trust into account, he had sufficient assets to make the payments) and sentenced him to sixty days in jail.

On appeal, the Massachusetts Appeals Court upheld the lower court's determination that the trust's ascertainable distribution standard meant the husband's interest in the trust could be quantified, and thus that interest could be included in the marital estate. However, the court set aside the contempt judgment, noting that the husband had written the Trustees requesting a distribution, and that it had not been proved by clear and convincing evidence that he had made no attempts to secure funds for his wife and had thus violated a court order.

Although irrevocable trusts provide a great measure of protection against a beneficiary's divorcing spouse, Pfannenstiehl illustrates that there are still circumstances (and states) where a trust alone does not provide complete protection. For this reason, a prenuptial agreement (wherein each party waives his or her right over assets held in trust for the benefit of the other) is the best mechanism for determining that trust assets will not be a factor in the division of marital property.

Wealth Management Update - November 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.

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.


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.