January 2021 Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts
Certain federal interest rates increased slightly for January of 2021 while others remained the same. The January 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 three-nine years (the mid-term rate, compounded annually) is .52%, up from 0.48% in December and down from 1.69% in January of 2020.
The January 2021 Section 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 0.6%, is unchanged from December and down from 2.0% in January of 2020.
The AFRs (based on annual compounding) used in connection with intra-family loans are 0.14% for loans with a term of 3 years or less, 0.52% for loans with a term between three and nine years, and 1.35% for loans with a term of longer than 9 years.
Thus, for example, if a ten-year loan is made to a child, and the child can invest the funds and obtain a return in excess of 1.35%, the child will be able to keep any returns over 1.35%. These same rates are used in connection with sales to defective grantor trusts.
California Franchise Tax Board Proposes Legislation for the Taxation of Income from Incomplete Non Grantor (ING) Trusts to Treat ING Trusts as Grantor Trusts-Legislative Proposal C adding new Section 17082 to the Revenue and Tax Code
The Franchise Tax Board has issued Legislative Proposal C to amend the Personal Income Tax Laws to require that, for taxable years beginning on or after January 1, 2022, the net income derived from an ING trust's assets be included in the grantor's gross income and be subject to California income tax. This proposal would potentially mitigate a developing tax strategy of shifting income to a state with more favorable tax treatment and, as such, avoiding state income taxes in the grantor's or beneficiary's state of residence. The proposed legislation suggests treating a grantor who is a California resident as of January 1, 2022, who transfers assets into an ING trust, in the same manner as a grantor of a grantor trust. If the legislation is enacted in 2021, the grantor will be subject to California income taxation on all of the trust's income as of January 1, 2022.
Chief Counsel Advice 202045011
Upon the dissolution of a trust, the trust's sole beneficiary (the "Beneficiary") directed the trustee to transfer the trust assets to a bank account over which the Beneficiary had no ownership or control. The IRS has ruled that a trust's transfer of assets to a third-party bank account at the direction of the trust's beneficiary was a transfer to the beneficiary and then a gift by the beneficiary to the owner of the bank account. Reg §25.2511-2(b) provides that as to any property of which a donor has so parted with...
