United States: Wealth Management Update (May 2017)

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

The May § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.4%, down 0.2% from April. The May 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 2.04%, down from 2.12% in April.

The relatively low § 7520 rate and AFR continue to present potentially rewarding opportunities to fund GRATs in May 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 1.15% for loans with a term of 3 years or less, 2.04% for loans with a term between 3 and 9 years, and 2.75% 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 2.04%, the child will be able to keep any returns over 2.04%. These same rates are used in connection with sales to defective grantor trusts.

Highest Court in Washington State Forces Estate To Include Federal Gift Taxes Paid by Decedent within 3 Years of Death for State Estate Tax Purposes

The Supreme Court of Washington, in a 5-4 decision, struck down a challenge to state estate taxes levied on $5.5 million in federal gift taxes paid by media mogul (and one-time owner of the Seattle SuperSonics) Barry Ackerly within 3 years of death. The estate, which included the gift taxes on its federal estate tax return, argued for exclusion on the grounds that the state estate law definition of "transfers" (limited to transfers "of the Washington taxable estate") was narrower than the federal definition under the IRC. This argument was rejected as contrary to the Washington legislature's intent to "mirror" the federal rules; the majority decision noted that the relevant inquiry was whether the taxable estate as a whole, rather than its constituent parts, transferred upon death. The dissent asserted that no transfer occurred upon death with regard to the gift taxes paid during the decedent's life, so the only justification for inclusion would be if the gifts themselves were deemed testamentary transfers.

The IRS Privately Rules on Tax Effects of Trust Funded Pursuant to Divorce (P.L.R.s 201707007 and 201707008)

The IRS ruled on the tax effects of a divorcing husband's contribution of company shares to a trust created pursuant to a property settlement agreement. The divorcing wife was entitled to net trust income and principal subject to trustee discretion or under a limited annual withdrawal right, but the trustee was prohibited from distributing or selling the company shares. She lacked any powers of appointment, and the remaining principal at her death was to revert to her ex-husband or his estate.

The IRS ruled that:

  1. Neither party would recognize gain or loss on the share contribution (deemed considered made for full and adequate consideration) or be treated as a donor;
  2. IRC 2702(a) won't apply to determine whether the transfer of the term interest in the trust is a gift or for purposes of determining the transfer's value;
  3. The fair market value of trust principal on the divorcing husband's death, reduced by the value of the divorcing wife's outstanding term interest, is includible in his gross estate; and
  4. The divorcing wife's estate will only include the value of any unexercised withdrawal rights.

The IRS Privately Rules that Declaratory Judgment Resolving Trust Ambiguities Does Not Cause Adverse Transfer Tax Consequences (P.L.R.s 201707003, 201707004 and 201707005)

The IRS ruled that no adverse tax consequences, including loss of grandfathered GST exemption, would flow from a declaratory judgment proposed by the trustee to resolve ambiguities in the beneficial interests of a trust previously modified by settlement agreement. The original trust, settled before October 21, 1942 for the primary benefit of the settlors' son, was the subject of litigation surrounding improper withholding of trust income by the trustee. After the settlement (which the IRS previously ruled did not jeopardize the grandfathered exemption from generation-skipping transfer tax of the split trusts), the son disclaimed his general power of appointment and the granddaughter thereafter disclaimed an interest contingent on the son's release of his general power of appointment.

These disclaimers, when read alongside the trust instrument and the settlement agreement, made the beneficiary class after the son's death ambiguous. Because the declaratory judgment resolved a bona fide issue regarding proper interpretation of dispositive provisions, applied the applicable law of the highest court of the state and did not vary the beneficial interests of the beneficiaries, there were no negative generation-skipping tax or gift tax consequences from the declaratory judgment. Further, because the original trust was created before October 21, 1942, disclaimer by the son of his general power of appointment did not qualify as a taxable exercise. Finally, the granddaughter's disclaimer was deemed a qualified disclaimer because the "9-month window" began on the date of the son's disclaimer.

U.S. Tax Court Rejects Art Valuation Due to Appraiser's Conflict of Interest in Estate of Kollsman v. Commissioner (T.C. Memo. 2017-40, T.C., No. 26077-09, February 22, 2017)

The U.S. Tax Court found that the estate of a New York taxpayer had undervalued two paintings it inherited by $1,770,000. The presiding judge ruled that the estate's expert was unreliable due to significant conflicts of interest. The paintings were first valued by Sotheby's "based on firsthand inspection" at $500,000 and $100,000, respectively. The $500,000 painting was eventually consigned to Sotheby's and listed at $2,400,000. The estate used the $500,000 and $100,000 valuations on the federal estate tax return. The IRS issued a deficiency notice, alleging values of $2.1 million and $500,000, respectively.

The IRS successfully argued that the Sotheby's valuation expert had direct financial incentive to curry favor with the executor by "lowballing" the values and also provided no comparables to support his valuations. The court ruled that the paintings would be valued at $1,995,000 and $375,000.

U.S. Court of Federal Claims Denies Foreign Gambler Income Tax Refund for U.S. Gambling Winnings in McManus v. United States (2017 BL 66227, Fed. Cl., No. 1:15-cv-00946, March 3, 2017)

The U.S. Court of Federal Claims rejected a creative treaty-based claim for refund on U.S. income taxes paid on $17.4 million in U.S.-sourced gambling winnings earned over three days. The taxpayer, an Irish citizen living in Switzerland, sought a refund under the U.S.-Ireland treaty by arguing that his payment of Ireland's "domicile levy" made him an income tax resident of Ireland under the treaty. Ireland does not tax gambling winnings and the U.S.-Ireland treaty states that income types not described by the treaty, such as gambling winnings, are taxable only in the taxpayer's country of residence. Unfortunately for the taxpayer, the IRS obtained advice from Ireland's Office of the Revenue Commissions that the domicile levy was not an income tax covered by the treaty and that the taxpayer had not been subject to Irish income tax since 1995.

Taxpayer's Dog Plays Significant Role in New York's Division of Tax Appeals Domicile Ruling in Favor of Taxpayer in In re Blatt, N.Y. Tax App. Trib., N. 826504, February 2, 2017

New York's Division of Tax Appeals determined that the Chairman of Match.com changed his domicile from New York to Texas in no small part because he moved his dog. The taxpayer moved to New York in 1992 and unobjectionably remained a New York resident until 2009, when he accepted the CEO position at the Dallas-based Match.com (a subsidiary of his former New York-based employer, InterActiveCorp ("IAC")). After that point, the taxpayer listed his New York apartment for sale and began renting a one-bedroom apartment and a car in Dallas. He also executed an amended employment agreement that listed his principal place of employment as Dallas. He then joined a Dallas gym, began obtaining his prescriptions and medical care in Dallas, obtained a Texas driver's license and voter registration, moved his dog, and finally changed his address with the U.S. Postal Service and his various banks and credit card companies. In 2010, the taxpayer completed the sale of his New York apartment, but shortly thereafter accepted a position as successor to Barry Diller as CEO of IAC, which ultimately required him to move back to New York City in mid-2011. During the taxpayer's "Dallas years," he still owned a car and a boat in New York and spent his summers predominantly in the Hamptons. However, the court found that taxpayer's move of his dog, a "near and dear item," constituted his "ultimate change in domicile to Dallas." Finding that the taxpayer proved a change in domicile by clear and convincing evidence, the assessment for tax years 2009 and 2010 was expunged.

Wealth Management Update (May 2017)

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
Proskauer Rose LLP
Day Pitney LLP
Proskauer Rose LLP
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Proskauer Rose LLP
Day Pitney LLP
Proskauer Rose LLP
Proskauer Rose LLP
Related Articles
 
Related Video
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