Wealth management update – Lexology


December Interest Rates for FREEs, Sales to Defective Grantor Trusts, Intra-Family Loans, and Interest-Shared Charitable Trusts

Federal interest rates increased slightly for December 2021 but remain historically quite low. The Section 7520 December rate for use with estate planning techniques such as CRTs, CLTs, QPRTs, and FREEs is 1.6%, which is 0.2% higher than the November rate. The Federal Applicable December Rate (“AFR”) for use with a sale to a defective cedor trust, a self-canceling payment note (“SCIN”), or an intra-family loan with a three to nine term note years (compounded annually) is 1.26%, up slightly from 1.08% in November.

The AFRs (based on the annual composition) used in the context of intra-family loans are 0.33% for loans with a term of three years or less, 1.26% for loans with a term of between three and nine years and 1.90% for longer term loans. that nine years. With short- and medium-term rates remaining low, clients who have the cash to repay their loans within three years are likely to prefer the short-term rate for their estate planning operations, and clients looking for a broader time horizon will likely prefer the short-term rate for their estate planning operations. use the average rate forward rate.

So, for example, if a 10-year loan is granted to a child and the child can invest the funds and obtain a return greater than 1.90%, the child will be able to keep any return greater than 1, 90%. These same rates are used in connection with sales to defective grantor trusts.

The Fifth Circuit Court of Appeal upholds the finding of deficiencies in the tax on donations after the taxpayer’s unsuccessful attempt to use self-adjustment formula clauses. Mary P. Nelson et al. v. Commissioner (5th Cir., N ° 20-61068, November 3, 2021)

In Nelson, the Federal Court of Appeal for the Fifth Circuit upheld the IRS’s imposition of gift tax deficiencies related to a client’s attempt to use a formula clause to make donations and separate sales of limited partnership interests. The taxpayer in this case entered into separate transactions in which she and her husband sought to sell and donate separate interests in a limited partnership of a determined fair market value “as determined by a qualified appraiser within four – twenty days following the date of entry into force of the [Agreement]. “

The court recognized that the self-adjustment formula clauses have been accepted by other courts in various forms. In particular, the court refers to self-adjustment formula clauses that refer to either (a) a specified fair market value “definitively defined for transfer tax purposes”, as in Wandry v. Comm’r, Memo CT. 2012-88 (2012 Tax Ct) or (b) a specified fair market value “as ultimately determined by the willing buyer / willing seller test” used in the relevant Treasury regulations in Estate of the McCord, 461 F.3d 614 (5th Cir. 2006).

However, the clause used by the taxpayer in Nelson was determined by reference to the initial assessment, and therefore was not subject to an adjustment in the event that the IRS determined that the interest transferred had a different value. Thus, once the initial appraisal has been finalized, the value of the investment sold has been established for the purposes of the instruments of sale. The Court therefore held that the IRS ‘subsequent determination that the value of the interest transferred was greater than the value stated in the original valuation had correctly led to the conclusion that the taxpayer had made additional donations and that he was subject to a corresponding donation tax.

The Federal District Court imposed a constructive trust on the assets of the estate and granted a temporary injection preventing the disposition of the estate based on allegations of embezzlement by the employer. Van Horn, Metz & Cie v. Crisafulli, 2021 WL 4317186 (DNJ 23 Sep 2021)

The United States District Court for the District of New Jersey ruled in favor of the former employer of a deceased who sued the deceased’s estate in New Jersey, alleging the deceased embezzled more than 4.3 million dollars while working as the employer’s controller.

The employer provided significant evidence that the estate could not refute the deceased’s embezzlement, including forensic accounting showing the deceased received excessive compensation, made improper ACH transfers from the employer, and used inappropriately unauthorized employer’s credit card. This evidence of wrongdoing that benefited the deceased strongly supported the fact that the employer would be substantively successful in its efforts to recover the assets of the estate. In addition, the employer has demonstrated that it would suffer irreparable harm without the imposition of a temporary restraining order based on evidence of consumption and dissipation by the executor (the surviving spouse of the deceased) of the estate assets, including real and tangible property that would have been purchased with the funds. In particular, the court referred to the sale by the executor of the family’s second home during the litigation without notice to the court or the employer and allocated approximately $ 500,000 of the proceeds (approximately 1/3 of the sale price) to be used to pay creditors as the type of consumption that would cause further irreparable harm to the employer.

Ultimately, the court imposed a constructive trust on a significant portion of the deceased’s estate and granted a temporary injunction against the estate, preventing the estate from disposing or other part of its assets.

Case of the month from the Proskauer fiduciary litigation group

New York City’s Second Department upholds an order denying probate due to lack of testamentary capacity and undue influence. Falkowsky case, 197 AD3d 1300 (NY 2d Dept., September 29, 2021)

The Second New York Department upheld an order denying probate of a will due to lack of will capacity and undue influence when the promoter of the will (being the deceased’s sister) was unsuccessful to prove that the deceased had the capacity. The deceased in Falkowsky executed a will leaving half of his estate to the promoter (considerably removing his children). The will was not executed until five months after the deceased was admitted to a hospital for rehabilitation and less than two weeks after the promoter contacted the drafting attorney (who was his own lawyer) to meet with the deceased to the first time.

The objector in Falkowsky provided evidence that the deceased was entirely dependent on hospital staff while in hospital for rehabilitation. The promoter offered no medical evidence regarding the deceased’s capacity on the day the deceased executed the relevant will, while the opponent was able to refer to months of medical records regarding the deterioration of the physical and mental condition of the deceased.

Additionally, when the deceased met with the attorney-writer, the deceased believed his estate was approximately $ 1.5 million, but did not provide information regarding a tax-deferred annuity of $ 884,447. which he was entitled to collect on the death of his wife almost nine years previously, but which he never actually collected. In the end, the fact that the deceased did not discuss the uncollected annuity with the drafting attorney or collect the annuity was strong evidence the court relied on to deny the probate will and confirm. the conclusion that the deceased did not have testamentary capacity.

To take with: When considering whether a person has testamentary capacity, one often wonders whether the testator is alert and healthy. But testamentary capacity demands more: A testator must understand “the nature and extent of his property,” a requirement in New York, Florida, and many other jurisdictions. Falkowsky, a case where the court could have confirmed the refusal of the will for multiple reasons, underlines the importance of this element of testamentary capacity. It reminds individuals how essential it is to understand their financial situation before creating an estate plan. Failure to do so could have dire consequences.


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