United States: Wealth Management Update - November 2018

November 2018 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 3.6%, an increase from 3.4% in 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 semiannually) is 3.02%, also increased from 2.81% in October.

The still relatively low § 7520 rate and AFRs 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 semiannual compounding) used in connection with intra-family loans are 2.68% for loans with a term of 3 years or less, 3.02% for loans with a term between 3 and 9 years, and 3.19% 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 3.02%, the child will be able to keep any returns over 3.02%. These same rates are used in connection with sales to defective grantor trusts.

Federal District Court holds that FBAR claims against a decedent can be brought against a distributee of the decedent's estate
U.S. v. Schoenfeld, No. 3:16-cv-01248-J-34PDB (Middle Dist. Fla 9/25/2018)

The Federal District Court for the Middle District of Florida held that a tax penalty claim enforceable against a decedent could be brought after his death against a distributee of said decedent's estate, solely in such person's capacity as distributee.

Steven Schoenfeld, a U.S. citizen, established a foreign brokerage account for which he was required to file an annual Foreign Bank Account Report ("FBAR") but failed to file FBARs from 1993-2010. On September 30, 2014, the IRS assessed a civil penalty against Steven for willfully failing to file. Steven died testate on August 21, 2015, naming his son, Robert Schoenfeld, as the sole distributee of his estate (the "Estate"). Robert was also named as personal representative in Steven's will, but did not present the will for probate.

On September 29, 2016, the government initiated an action to obtain a judgment for its assessed FBAR penalties. In October of 2016, the Government learned that Steven had died. Subsequently (and outside the statute of limitations), the government amended its complaint to name as defendants (a) the Estate and (b) Robert Schoenfeld, as a distributee of the Estate. Robert was not named in his capacity as personal representative because the will was not admitted to probate.

Robert and the Estate moved to dismiss, arguing, among other things, that: (a) the complaint could not be brought against Steven because he was dead, rendering the claim a legal nullity, and (b) Robert, in his capacity as a distributee, was an impermissible defendant under USC § 2404 ("Section 2404"), which sets forth the rule for when claims against decedents are enforceable against successors in interest and when they abate.

The court (treating the motion to dismiss as a motion for summary judgment) held that the claim was not a legal nullity—although Steven was dead and lacked the capacity to be sued, the government's amended complaint (naming Robert and the Estate as defendants), satisfied procedural requirements for amendment and relation back. The Estate, however, did not have capacity to be sued—an estate's capacity to be sued is governed by the state where it is located, and Florida law provides that only a personal representative, and not an estate, has the capacity to be named as a defendant in a lawsuit.

The Estate did not have an appointed personal representative. However, the court held that Robert was a permissible defendant in his capacity as a distributee of the Estate under Federal Rule of Civil Procedure ("FRCP") 17, which governs which parties have the capacity to be sued. The court's reasoning proceeded by analogy to FRCP 25, which permits a court to substitute for a deceased party to a lawsuit such party's "successor or representative" when litigation continues following said party's death. In that context, a "successor" can include "a distributee of a decedent's estate." For consistency of interpretation, the court interpreted FRCP 17 to include a distributee of a decedent's estate, at least in respect of a claim against the decedent. Accordingly, the court held that Robert was a proper party to the lawsuit.

In so holding, the court also analogized to a common practice of substituting distributees for decedents when no personal representative is yet appointed and a claim must be filed before the expiration of a statute of limitations. In this case, however, Robert was named as a distributee despite the fact that there was no indication that a personal representative would ever be appointed. Note, however, that Robert was not only the sole distributee, but also the personal representative named in Steven's will—this fact, while not explicitly the basis for the court's reasoning, was raised at key points in the opinion.

Settlement in Cahill case follows the Tax Court's implication that the estate tax value of an intergenerational split-dollar life insurance receivable could be equal to the cash surrender value of the underlying policy
Estate of Richard Cahill, US Tax Court Docket No. 10451-16, Joint Stipulation of Settled Issues, August 16, 2018.

Estate of Cahill v. Commissioner (summarized in greater detail in the October 2018 Wealth Management Update) involved a series of intergenerational split-dollar life insurance arrangements entered into on behalf of various trusts of Richard Cahill (an incompetent 90-year-old man) by Richard's son, Patrick, acting as trustee of Richard's revocable trust and as Richard's attorney-in-fact (Patrick was also a beneficiary and executor of Richard's estate). The relevant insurance policies were on the lives of Patrick and Patrick's wife, with Richard's revocable trust as the payor in exchange for a receivable. Richard died shortly after these arrangements were put in place.

For estate tax purposes, Richard's estate (the "Estate") sought to value the receivables at $183,700, the present value of the right to be repaid. This figure was based in part on a 98% discount due to the long life expectancy of the insureds. The IRS argued instead that the full cash surrender value of the policies ($9,611,624) was includible in the decedent's estate, applying Internal Revenue Code Sections 2036, 2038 and 2703 and noting the right of Richard's revocable trust, together with other trusts involved in the structure, to designate the persons who would possess and enjoy the property.

The Estate moved to dismiss, arguing that that the discounted value was appropriate due to the decedent's limited rights to terminate the split-dollar arrangements and that Internal Revenue Code Sections 2036, 2038 and 2703 did not apply—rather, the economic benefit regime (Treas. Reg. § 1.61-22) should be used to value the receivables for estate tax purposes. The Tax Court denied summary judgment on the estate tax valuation issue, despite an apparently favorable ruling in Estate of Morrissette v. Commissioner, 146 T.C. 171 (2016), regarding the general income and gift tax treatment of such arrangements under the economic benefit regime. In so doing, the Tax Court noted that the economic benefit regime applies to gift tax, not estate tax, thus distinguishing the ruling in Morrissette.

On August 16, 2018 (following the above-referenced denial of summary judgment), the Cahill Estate settled. Among the terms of the settlement, the Estate conceded the value of the split-dollar receivables, accepting the cash surrender value of the policies as of the decedent's death ($9,611,624) rather than the present value of the decedent's rights to be repaid ($183,700).

While this settlement may appear to be a victory for the IRS, it should be noted that the Cahill case involved particularly "bad facts," including (among many others) the steep discount rate used by the Estate, Richard's advanced age and incompetency, and the fact that Richard's son set up the split-dollar arrangements on Richard's deathbed, while acting as Richard's trustee and attorney-in-fact.

It also should be noted that the Cahill settlement is not a statement of law—two similar cases are currently before the court, either one of which may resolve this issue on better facts. Estate of Clara M. Morrissette, US Tax Court Docket No. 4415-14, a continuation of Morrissette specifically litigating the estate tax valuation of the split-dollar receivable, is scheduled to go to trial in April 2019.  Estate of Marion Levine, US Tax Court Docket No. 13370-13, went to trial in November 2017 but has not yet been decided.

In the Matter of the Petition of Wiesen, Tax Appeals Tribunal, Dkt. No. 826284, 09/13/2018

On a New York personal income tax audit, the Tax Appeals Tribunal found that taxpayer Jeremy Wiesen failed to relinquish his New York domicile and establish Florida domicile, in part because Mr. Wiesen had continued to maintain a rent-controlled apartment to ensure the transition to his son as successor tenant. The court's ruling primarily was based on Mr. Wiesen's failure to provide enough evidence for the factors indicating a domicile change. The evidence Mr. Wiesen did provide was unpersuasive to the tribunal, because it took the form of "self-serving" declarations of domicile (such as writing declaration letters, filing New York nonresident tax returns, and applying for a Florida homestead exemption) as opposed to the more persuasive "informal" indicators (e.g., pay stubs, bills, proof of use of country clubs).

The court noted that a different taxpayer prevailed in a domicile controversy involving a key fact in the Wiesen matter—the maintenance of a rent-controlled apartment—because that taxpayer introduced concrete evidence and "credible" testimony (including affidavits). Accordingly, this case underscores the importance of generating and preserving detailed evidence in support of any contemplated change in domicile and the significance of informal (as opposed to formal and declarative) indicators of domicile.

Tax Cuts and Jobs Act ("TCJA") – Changes to the Alimony Tax Regime Effective after December 31, 2018

The TCJA's changes to the taxation of alimony will take effect for alimony payments made pursuant to divorce or separation instruments executed after December 31, 2018. Alimony payments under agreements executed after that date will no longer be deductible by the paying ex-spouse, nor will they be included in the gross income of the recipient ex-spouse. This change is expected to affect divorce negotiations in cases where one spouse earns significantly more than the other, potentially reducing the use of alimony in favor of increased planning based on the division of assets. The imminent change also may result in a rush to conclude separation and divorce negotiations prior to 2019.

Wealth Management Update

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
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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.


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.


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