April Interest Rates for GRATS, Sales to Defective Grantor Trusts, Intra-Family Loans and Charitable Shared Interest Trusts
The Section 7520 April rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 5.0%. The applicable federal rate (“AFR”) for April to be used in connection with a sale to a defective settlor trust or an intrafamily loan with a note with a term of:
- 3 years or less (the short-term rate, compounded annually) is 4.86%;
- 3 to 9 years (the medium-term rate, compounded annually) is 4.15%; And
- 9 years or more (the long-term rate, compounded annually) is 4.02%.
The Section 7520 rate and AFRs have risen steadily with inflation, although rates are still relatively low. Clients considering any type of transaction whose success depends on these “limit rates” may wish to proceed sooner rather than later.
Bittner v. United States598 United States ___ (2023)
Alexandru Bittner is an American and Romanian citizen born in Romania, immigrated to the United States in 1982, returned to Romania in 1990, and then returned to the United States in 2011. At some point after his return, he learned of his obligation under the Bank Secrecy Act to file FBARs. Bittner then retained a CPA to file FBARs for 2007-2011. These FBARs declared his most important accounts, but omitted some accounts over which he had signing authority. The government learned of the omission and Bittner then filed revised reports. The government imposed a penalty of $2.72 million based on the theory that the penalty should be assessed per account and not per statement.
For willful failure to file an FBAR, the penalty is the greater of $100,000 or 50% of an unreported account balance. Prior to this notice, there was a split in the circuit regarding the penalty for an unintentional failure to file an FBAR. The Ninth Circuit found there was a penalty of $10,000 per statement (all foreign bank accounts over $10,000 must be listed on one statement); the Fifth Circuit ruled there was a penalty of $10,000 per account.
The Supreme Court ruled that the penalty is assessed on a per statement basis. The Court cited various theories of statutory interpretation and administrative law.
Green Paper 2023 Proposals – Relevant to Transfer Rights, Trusts and Valuation
The Green Book is a publication issued by the Department of the Treasury (the “Department”) describing the Department’s proposed changes to the revenue laws. The Green Paper simply contains proposals which do not have the force of law. The suggestions below.
A. Expand the IRC definition of the executor so that it [is] applicable for all tax purposes, and would authorize such executor to do anything on behalf of the deceased in connection with the tax liabilities of the deceased before death or other tax liabilities which the deceased might have done if still urge.
b. Increase the Special Assessment use limit from $750,000 (adjusted for inflation) to $13 million (the proposal does not specify whether the new amount would be adjusted for inflation).
vs. Extend the automatic lien for 10-year estate and gift taxes until the end of the period “during any deferral or remittance period for unpaid estate and gift taxes.”
d. Require that all trusts with either (1) a total estimated value on the last day of the tax year of $300,000 or more (adjusted for inflation) or (2) gross income of more than $10,000 or more (adjusted for inflation) to report to the IRS:
I. The name, address and TIN of each settlor and trustee; And
ii. Information about the nature and estimated net worth of the trust, as determined by the Department. The value could be reported via a range estimate.
In addition, each trust (regardless of value or income) would be required to file a return each year:
I. The inclusion rate of the trust when a distribution is made to a non-skip person; And
ii. Any information regarding a change in trust or a transaction with another trust.
e. Formula clauses will have no effect to the extent that such a clause depends on an IRS related event.
F. The current annual interest exclusion as we know it would be eliminated. It would be replaced by a tax exclusion of $50,000 (indexed to inflation) per donor. There would be no requirement that such transfers relate to current interests in property.
g. The GST exemption would only apply to direct skips and taxable distributions to (a) beneficiaries no more than two generations before the transferor and (b) younger beneficiaries living at the time of the transfer. creation of the trust. The GST exemption could also only be attributed to taxable terminations occurring while the aforementioned persons are beneficiaries of a trust.
h. There would be a radical change regarding the tax treatment of GRATs:
I. GRATs would be required to have a minimum taxable gift equal to the greater of (1) 25% of the value of assets transferred to the trust and (2) $500,000 (but not greater than the value of assets transferred).
ii. If the grantor acquires GRAT assets in a substitution transaction, the grantor would be required to recognize the gain or loss.
iii. GRATs would be required to have a minimum term of 10 years.
I. Transactions between the settlor of a trust and a settlor trust would be taxable events and the payment of income tax by the settlor would be a taxable gift.
d. The purchase by a GST trust of the assets of a non-exempt trust would result in a mixed inclusion ratio.
k. The residual interest of the CLATs must be equal to at least 10% of the value of the contributed property (no zero CLAT) and the CLAT annuity payments must be equal (no shark fin CLAT).
I. Loans made to a beneficiary of the trust would be considered a distribution effecting DNI and repayment of a loan by the settlor or the settlor’s spouse would be considered a contribution to the trust.
M. There would be restrictions on asserting that a note has sufficient interest for gift and income tax purposes, but then discounting the note on a 706.
nm If a family member transfers unlisted assets to a family member, the value of the transfer would be equal to the prorated amount of the fair market value of all interests held by the family. Essentially, this would eliminate discounting. This would only apply to entities where one family owns 25% or more.
In re the Trust of Eva Marie Hanson Living Trust dated December 11, 1995 (Minn. Ct. App. January 30, 2023)
Settlor established a revocable trust under Minnesota law in 1995. She had two children: Randy and Shari. After Settlor established the trust, Randy had a car accident in which he became disabled and received government assistance.
In 2013, Settlor amended the trust to provide that if her spouse predeceased her, half of the residue would be distributed to her children, in installments. In 2013, Settlor also executed a durable power of attorney granting Shari all standard powers, including “fiduciary transactions”. However, the trust provided that the right “to vary or revoke my trust is personal to me and not exercisable by any legal representative or agent acting on my behalf”.
In 2017, a series of transactions that created controversy took place. Randy’s wife, Linda, set up a trust for Randy’s special needs. Randy was the beneficiary of life and Linda was the restman. Randy executed a will in which he left his entire estate to Linda and disinherited her children.
Shari, through her Power of Attorney, amended the Settlor’s Trust to provide that upon the Settlor’s death, Randy’s share was to be distributed to his Special Needs Trust.
Randy died in 2019 and his children challenged the 2019 amendment. The trial court held for Linda and Shari. On appeal, the Minnesota Court of Appeals ruled that the 2017 amendment was invalid because the trust did not provide for the ability to amend via power of attorney.
Vouk vs. Chapman521 P.3d 712 (Idaho 2022)
Bill and Margaret Chapman established an irrevocable trust for their seven children in 1993, which was funded by two life insurance policies. Each of the seven children was also appointed trustee. In the opinion, the trust agreement appears to have created separate units for each child, but the assets were held in one unit.
In 2004, via a sec. 1035 exchange, one of the life insurance policies was exchanged for a new policy on the grantor’s life with a death benefit of $7,000,000.
In 2007, the trust acquired 35 shares of Idaho Supreme Potatoes, Inc. Later in 2007, the trustees and beneficiaries entered into a distribution agreement in which they agreed that the trust would terminate and the assets would be divided equally between each beneficiary. The agreement stated that the assets of the trust were “35 common shares of Idaho Supreme Potatoes, Inc.” and “certain life insurance policies”.
Both Bill and Margaret Chapman died in 2018. Subsequently, one of the settlor’s children and a co-trustee, Wade Chapman, applied for the death benefit on behalf of the trust. He was informed that he and not the trust was designated as the beneficiary. However, the policy data page named the trust as the policy owner. Nevertheless, Wade Chapman requested the death benefit and did not release any portion of the death benefit to the other beneficiaries of the trust.
The other siblings sued alleging, among other things, breach of fiduciary duty. The district court held for the siblings and Wade appealed. On appeal, the Idaho State Supreme Court ruled that Wade breached his fiduciary duty.
The Court dismissed any argument that the policy was intended solely for Wade or that the distribution agreement signed in 2007 relieved Wade of responsibility for distributing life insurance proceeds to beneficiaries. Additionally, the Court noted that under Idaho law, Wade had to obtain approval from an Idaho court before entering into the life insurance transaction because it involved a conflict of interest.