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.

In association with
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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

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