United States: Wealth Management Update - June 2016

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

The June § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 1.8%, which has remained constant since March. The June 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 semiannually) is 1.41%, down from 1.43% in May.

The relatively low § 7520 rate and AFRs continue to present potentially rewarding opportunities to fund GRATs in June with depressed assets that are expected to perform better in the coming years.

The AFRs (based on semiannual compounding) used in connection with intra-family loans are 0.64% for loans with a term of 3 years or less, 1.41% for loans with a term between 3 and 9 years, and 2.23% 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 1.41%, the child will be able to keep any returns over 1.41%. These same rates are used in connection with sales to defective grantor trusts.

The Tax Court held that split-dollar insurance arrangements between the decedent and three dynasty trusts she had created for her sons were taxable under the economic benefit regime in Estate of Clara M. Morrissette et al. v. Commissioner, 146 T.C. No. 11; No. 4415-14 (April 13, 2016)

Clara Morrissette had three sons, each of whom was a shareholder in the family's corporation. The family entered a buy-sell agreement under which the parties agreed that upon the death of any of the sons, the other sons and their dynasty trusts would purchase the family stock held by or for the benefit of the deceased son.

To fund the buy-sell agreement, each son's dynasty trust purchased a universal life insurance policy on the life of each other son. Clara's revocable trust entered split-dollar insurance arrangements with the three dynasty trusts and contributed an aggregate of $29.9 million to them to enable the trusts to purchase such policies with a lump sum payment. Under the split-dollar arrangements, Clara's revocable trust was entitled to receive a portion of the death benefit from each policy equal to the greater of the cash surrender value of the policy or the aggregate premium payments on that policy, and each dynasty trust was entitled to the balance of the death benefit under a policy. Each split-dollar arrangements included a representation that the parties intended the agreement to be taxed under the economic benefit regime. The dynasty trusts executed collateral assignments of the policies to Clara's revocable trust to secure their obligations and none of the trusts had the right to borrow against the policies.

The IRS argued that the economic benefit doctrine should not apply to the arrangements because under the terms of the revocable trust, Clara's revocable trust's interest in the policies' cash values would pass to the dynasty trusts or to Clara's sons upon her death. The IRS asserted that such provisions give the dynasty trusts indirect access to the cash surrender value of each policy. The Court rejected this argument noting that (i) Clara could at any time during her lifetime change the terms of her revocable trust; (ii) the split-dollar arrangements did not require the revocable trust to distribute its interest to the dynasty trusts; and (iii) the governing treasury regulations look only to the current or future rights to cash value "under the arrangement" and the provisions of the revocable trust were not part of the split dollar arrangement.

The Court also rejected the IRS's argument that by paying the premiums in a single lump sum, Clara's revocable trust conferred on the dynasty trusts the benefit of current and future insurance protection. The Court noted that such argument would only hold water if the dynasty trusts were obligated under the split-dollar arrangements to pay the premiums.

Because the Court found that the dynasty trusts did not receive an economic benefit beyond that of current life insurance protection, it deemed Clara's revocable trust to be the owner of the policies and the economic benefit regime to apply to the split-dollar arrangements.

The Tax Court prevented taxpayer from using her deceased husband's AMT tax credit carryforward to offset her own individual income tax liability in Vichich v. Commissioner, 146 T.C. No. 12; No. 7509-12 (April 21, 2016)

Following the death of her husband, Nadine Vichich attempted to use an AMT credit carryforward that arose from her husband's exercise of incentive stock options before his death.

Because the applicable statue and regulations did not provide a clear answer regarding whether such credits could be transferred to a surviving spouse, and there was no judicial guidance on the issue, the Court looked to general tax principles that apply to deductions to make its decision, noting that (a) the ability to offset one spouse's income with another's losses is only available to spouses who file joint income tax returns;
(b) spouses generally cannot inherit or otherwise retain, after a marriage ends, a tax benefit that was originally conferred on the other spouse; and (c) deductions generally are not transferrable on the death of the taxpayer who incurred them.

As a result, the Court held that Nadine was not entitled to use her husband's AMT tax credits to offset her own income tax liability after his death.

The U.S. District Court allowed the government to attach a federal tax lien to a delinquent taxpayer's right to funds in a trust established for him under his deceased mother's Will in Duckett v. Enomoto et al., No. 2:14-cv-01771 (April 18, 2016)

Dennis Enomoto, who is delinquent in paying his federal income taxes, is the beneficiary of a testamentary trust that provides that the Trustees shall pay to Dennis so much or all of the net income and principal of the trust as in the sole discretion of the Trustees may be required for support in Dennis's accustomed manner of living. The IRS sought to attach a tax lien to the trust and to seize all of its assets.

Generally, the government may only impose a tax lien on any "property" or "rights to property" belonging to the taxpayer. The Court looked at the specific language in the trust and the Arizona uniform trust code and concluded that Dennis had a right to the property in his trust because, even though the Trustees had the discretion to determine how much to pay him, the language "shall pay" created an enforceable right to payments, the withholding of which would constitute an abuse of discretion in applying an ascertainable standard.

The Court distinguished the facts of this case from a case where a trust provided that the Trustees may distribute income or principal to a beneficiary and directed that any income not so distributed be accumulated. The Court noted that in such case, it was clear that the Trustee was not obligated to distribute anything to the beneficiary and, therefore, the beneficiary did not have a property right in the trust.

Although the Court held that the IRS could attach a tax lien to the trust, it denied the government's motion for summary judgment for permission to seize all of the trust's assets. The Court noted that Dennis's enforcement right does not by itself justify enforcement of the lien to any specific amount of the trust.

IRS Issues Final Regulations Regarding Program-Related Investments under IRC § 4944

On April 25, 2016, the IRS published final regulations that provide guidance and examples to private foundations engaging in program-related investments. The final regulations add nine new examples to the existing examples illustrating investments that qualify as program-related investments.

Whereas the prior examples were primarily concerned with domestic investments in programs involving economically disadvantaged individuals and deteriorated urban areas, the new examples demonstrate that program-related investments may fund activities in foreign countries as well as investments in organizations undertaking environmental, scientific, or micro-loan programs.

The final regulations made changes to proposed Examples 11, 13 and 15. Notably, in Example 13, which describes a situation in which the business enterprise offers a private foundation common stock as an inducement for the foundation to make a below-market rate loan, the final regulations remove the sentence that stated that the foundation plans to liquidate its stock in the business as soon as the business is profitable or it is established that the business will never become profitable. Despite removing such sentence, the commentary to the final regulations indicates that the IRS believes that establishing an exit strategy at the outset of an investment is an important indication that a foundation's primary purpose in making a program-related investment (and, therefore, a qualifying investment) is furtherance of its charitable purpose.

Florida has adopted the Florida Fiduciary Access to Digital Assets Act

Florida has adopted the Florida Fiduciary Access to Digital Assets Act. The statute provides owners of digital assets the ability to plan for the management and disposition of those assets by specifying whether they will be preserved, distributed to heirs, or destroyed. In addition, the law gives fiduciaries legal authority to manage digital assets and custodians that comply with a fiduciary's apparent authority immunity from liability under the statutes that prohibit unauthorized access to such assets. The law applies to four types of fiduciaries, including: (i) personal representatives of decedents' estates, (ii) guardians of the property of minors or incapacitated persons, (iii) agents who are acting under a power of attorney and (iv) trustees.

The act will be located in the new chapter 740 in the Florida Statutes and will become effective on July 1, 2016.

Wealth Management Update - June 2016

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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