Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

The IRS recently released the Applicable Federal Rate, or “AFR,” for October, 2011.  The AFR is a key interest rate used in connection with a number of the more sophisticated estate planning techniques, such as grantor retained annuity trusts (“GRATs”), sales to intentionally defective grantor trusts, and qualified personal residence interest trusts (“QPRITs”).

The mid-term AFR for October is 1.4%, which is historically low.  This means that GRATs, sales to grantor trusts, and intra-family loans are even more attractive in October because the amount that is required to be paid back to the donor under these techniques is relatively lower due to the extremely low interest rate. 

On the other hand, techniques in which the value of the gift is dependent upon the value of the income interest retained by the grantor, such as QPRITs or charitable remainder annuity trusts (“CRATs”), are not as attractive.  For these techniques, the low interest rate leads to a lower value for the retained interest and a higher value for the remainder interest, thereby resulting in a larger taxable gift when the technique is implemented.

With the increased lifetime gift exclusion ($5 million in 2011 and 2012) and the possibility that the use of GRATs may be restricted in the future, now may be the time to explore some of the estate planning approaches that have been enhanced by historically low interest rates.

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On August 17, 2011, New York Governor Andrew Cuomo signed legislation that substantially revises New York’s trust decanting statute, NY EPTL 10-6.6.  New York was the first state to enact a decanting law in 1992.  The statute offers one effective method to revise or update otherwise irrevocable trusts.  The revisions to the statute significantly expand its scope, including the following changes:

“Absolute discretion” standard expanded.  Under the old New York law, the trustee had to have “absolute discretion” to invade the trust principal in order to be able to decant the trust.  The new law relaxes this requirement.

Under the new law, if the trustee has “unlimited discretion” to distribute the trust principal, the trustee may decant the trust in favor of one or more of the trust beneficiaries, to the exclusion of others.  Similarly, the remainder beneficiaries of the new trust can be one or more of the remainder beneficiaries of the old trust, to the exclusion of others. 

For example, if a trust permits distributions to any of four children for the “best interests” of any of them, the trustee could decant the entire trust in favor of only one of the children.  The rationale is that such a distribution falls within the trustee’s broad discretion under the terms of the trust. 

If the trustee does not have “unlimited discretion” – for example, the trust only permits principal distributions according to a “health, education, maintenance and support” standard – then the trustee still may decant the trust, but the beneficiaries of the new trust must be the same as the old trust, and the new trust must contain the same standard regarding principal distributions.  

Notification.  The revised New York decanting statute still requires that all interested parties be notified of the changes to the trust.  In addition, the revised statute provides that, unless the beneficiaries consent, the decanting will become effective 30 days after service of notice. 
Feel free to contact us if you have any questions about the pros and cons of decanting a trust, or the application of New York’s decanting statute.

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On September 13, 2011, the IRS announced that large estates of individuals who died in 2010 will have until early next year to file various required returns and pay any estate taxes due.  In addition, the IRS is providing penalty relief to certain beneficiaries of these estates on their 2010 federal income tax returns.

This relief is designed to give large estates, normally those over $5 million, more time to comply with the tax law changes enacted late last year.  The IRS is providing the following relief:

1. Large estates, opting out of the estate tax, now will have until Tuesday, January 17, 2012, to file Form 8939.  This carryover basis form, required of estates making this choice, was previously due on November 15, 2011.  Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply.

2. 2010 estates that request an extension of time to file on Form 4768 will have until March 2012 to file their estate tax returns and pay any estate tax due.   Normally, a six-month filing extension is automatically granted to estates filing this form, but extensions of time to pay are granted only for good cause.  As a result, most 2010 estates that timely file Form 4768 will have until Monday, March 19, 2012 to file.   For estates of those dying late in 2010 (after Dec. 16, 2010 and before Jan. 1, 2011), the due date is 15 months after the date of death.  No late-filing or late-payment penalties will be due, though interest still will be charged on any estate tax paid after the original due date.

3. Special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the October 17, 2011 extended due date.  Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election.  Further details are provided in Notice 2011-76 posted on IRS.gov.

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On September 6, 2011, the Christie Administration announced that the New Jersey Division of Taxation will extend tax payment and filing deadlines for individuals and businesses whose operations were disrupted by Hurricane Irene.  Taxpayers who are not able to make normal deadlines for any tax filings (including estate and inheritance tax returns) that were due on or after August 27, 2011 have been extended until October 31, 2011.  All 21 New Jersey counties have been declared federal disaster areas and would qualify for this relief.

In New York, deadlines for tax returns due on or after August 26, 2011 and before October 31, 2011 have also been postponed until October 31, 2011.  This applies to taxpayers directly affected by the storm in the counties of Albany, Clinton, Delaware, Dutchess, Essex, Greene, Montgomery, Nassau, Orange, Otsego, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Sullivan, Suffolk, Ulster, Warren and Westchester. This does not affect New York, Kings, Bronx or Queens Counties.

Also, the Internal Revenue Service is giving affected taxpayers until October 31, 2011 to file most tax returns (including estate, gift or GST tax returns), or to make tax payments that have either an original or extended due date occurring on or after August 27, 2011, and on or before October 31, 2011.

We will keep you apprised of the developments regarding this relief.

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