Applicable Federal Rates and Code Section 7520 Rate for November 2018 – Trending Up

Posted in Applicable Federal Rates (AFRs), Charitable Planning, Estate, Estate Planning, Estate Tax, Gifts, Income Tax, Internal Revenue Code, Legacy Planning, Tax Planning

The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the following month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate planning techniques also involve numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances. This should be undertaken only with the advice of competent tax counsel and financial advisors.

The IRS has issued Revenue Ruling 2018-28, which provides the AFRs and 7520 rate for November 2018. Revenue Ruling 2018-28 will appear in Internal Revenue Bulletin 2018-45 dated Nov. 5, 2018.

What is the Applicable AFR? The applicable AFR is the minimum acceptable or safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences — based on the month in which the loan is made, how frequently interest is compounded, and the length or term of the loan.

AFRs Trending Up. Following a slight decrease in the mid-term and long-term rates for October 2018, AFRs for November 2018 increased across the board, making intra-family loans and installment sales to grantor trusts generally less attractive.

November AFRs Summary. The AFRs for November 2018 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term 2.70% 2.68% 2.67% 2.67%
Mid-Term 3.04% 3.02% 3.01% 3.00%
Long-Term 3.22% 3.19% 3.18% 3.17%

2018 Historical AFRs. In reverse chronological order, the AFRs for January through November 2018 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
November 2018 2.70% 2.68% 2.67% 2.67%
October 2018 2.55% 2.53% 2.52% 2.52%
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
June 2018 2.34% 2.33% 2.32% 2.32%
May 2018 2.18% 2.17% 2.16% 2.16%
April 2018 2.12% 2.11% 2.10% 2.10%
March 2018 1.96% 1.95% 1.95% 1.94%
February 2018 1.81% 1.80% 1.80% 1.79%
January 2018 1.68% 1.67% 1.67% 1.66%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
November 2018 3.04% 3.02% 3.01% 3.00%
October 2018 2.83% 2.81% 2.80% 2.79%
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
June 2018 2.86% 2.84% 2.83% 2.82%
May 2018 2.69% 2.67% 2.66% 2.66%
April 2018 2.72% 2.70% 2.69% 2.68%
March 2018 2.57% 2.55% 2.54% 2.54%
February 2018 2.31% 2.30% 2.29% 2.29%
January 2018 2.18% 2.17% 2.16% 2.16%
Long-Term AFRs – For notes with a term in excess of nine years.
November 2018 3.22% 3.19% 3.18% 3.17%
October 2018 2.99% 2.97% 2.96% 2.95%
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%
June 2018 3.05% 3.03% 3.02% 3.01%
May 2018 2.94% 2.92% 2.91% 2.90%
April 2018 3.04% 3.02% 3.01% 3.00%
March 2018 2.88% 2.86% 2.85% 2.84%
February 2018 2.66% 2.64% 2.63% 2.63%
January 2018 2.59% 2.57% 2.56% 2.56%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan that can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120 percent of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate for November 2019. The 7520 rate for November 2018 is 3.6 percent.

7520 Rate Trending Up. The 7520 rate increased steadily during the beginning of 2018, remained at 3.40 percent for June 2018 to October 2018, and increased to 3.6 percent for November 2018, making planning techniques like qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) increasingly attractive. Conversely, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) have become generally less attractive as a result of this upward trend.

2018 7520 Rates. In reverse chronological order, the 7520 rates for January through November 2018 are as follows:

7520 RATE
November 2018 3.60%
October 2018 3.40%
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%
June 2018 3.40%
May 2018 3.20%
April 2018 3.20%
March 2018 3.00%
February 2018 2.80%
January 2018 2.60%

I Won the Lottery! What Do I Do Now?

Posted in Estate Planning, Income Tax, Inheritance Rights, Investing, IRS, Legacy Planning, lottery, State Tax, Tax Planning, Trusts

Greenberg Traurig’s private client/high net worth team has the experience to advise mega-lottery winners. Our attorneys have worked with individuals who have won some of the biggest lottery awards in the United States.

Our approach to advising lottery winner clients is based on three basic principles:

  1. Family privacy, security, and freedom from publicity
  2. Tax and estate planning
  3. Financial planning

In most instances we are the initial point of contact for our lottery winner clients. The first step is to assess the family situation and to explain to the clients what their options are:

  1. When do I turn in my lottery ticket, and how do I protect it before doing so?
  2. What are the client’s security concerns?
  3. Are there minor children?
  4. Which family member purchased the lottery ticket?
  5. Do the clients have an estate plan in place?

The next step is to assemble the team of advisors:

  1. Accountants
  2. Financial Advisors
  3. Security Advisors

Turning in Your Lottery Ticket

In most states such as California, the name of the lottery winner must be disclosed. For this reason, the timing of turning in the lottery ticket is important. If the award is in the millions, it is important to minimize the publicity once the ticket is surrendered. Most states provide that the lottery winner must surrender the winning ticket within twelve months. This provides ample time for the winner and the members of the winner’s family to take the steps described above.

For rewards in the tens of millions, it is important to select the right financial advisor. Greenberg Traurig’s team has worked with most of the major financial institutions in the United States. We generally recommend a “beauty contest,” i.e., setting up meetings with a select number of such financial institutions so that the lottery winner clients can learn about financial planning options as well as to assess the level of comfort that they have with the members of the team(s) that will provide financial and investment advice. For example, a “balanced portfolio,” i.e., a mix of bonds and equities, is usually considered where the lottery award is in the tens of millions.

We can answer many of the questions that winners might have either in person of via teleconference. We can also meet with the individual winner(s) and members of their families for an initial consultation.

Qualified Opportunity Zone Proposed Regulation Release

Posted in Opportunity Zones

On Friday, October 19, the United States Department of the Treasury released (i) proposed regulations related to investment in Qualified Opportunity Zones and Qualified Opportunity Funds and (ii) Revenue Ruling 2018-29 related to the treatment of land under the program.  The issuance of this highly anticipated regulation and guidance will be critical to investors, Qualified Opportunity Fund managers, and project sponsors involved in real estate, venture capital, operating business, and project finance in Qualified Opportunity Zones.  We have been working extensively with clients with this new tax incentive and will be releasing analysis and webinars in the near future describing the impact of these new regulations and Revenue Ruling.

Please find the link to the published proposed regulations below:

https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf

International Tax Survival Guide: Countdown to Common Reporting Obligations for Global Individuals

Posted in International Tax

The due date for filing 2017 U.S. federal income tax returns for individuals who have requested an extension is Oct. 15, 2018. With only one month left until the deadline, we have prepared a countdown of 10 common tax reporting obligations that may be relevant to global individuals with cross-border assets or activities.

10, 9, 8, 7: Information Returns Relating to Offshore Entities

10. Form 5471

Form 5471 is used by U.S. persons who are officers, directors, or shareholders in certain foreign corporations, including controlled foreign corporations (CFCs), to satisfy the reporting requirements of sections 6038 (reporting with respect to certain foreign corporations) and 6046 (returns relating to organizations and reorganizations of foreign corporations).

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California Locally Assessed Property Tax: 2018 Appeal Filing Deadline Approaching

Posted in Real Estate, State Tax, Tax Planning, Uncategorized

County Assessors across California believe that the property located in their counties is worth substantially more this year than it was last year. Each Assessor is required to prepare an annual assessment roll consisting of all taxable property in their county. In many counties, roll values increased substantially: San Francisco (↑10.80 percent), San Mateo (↑8.03 percent), Santa Clara (↑7.34 percent), San Bernardino (↑7.30 percent), Alameda (↑7.11 percent), Placer (↑7.08 percent), Sacramento (↑6.75 percent), Los Angeles (↑6.62 percent), Contra Costa (↑6.34 percent), Orange (↑6.23%), Riverside (↑6.20 percent), and San Diego (↑6.11 percent). This is in spite of Proposition 13 protections and reflects, in part, a return to base year values after reductions given after the 2008 market collapse.

As such, taxpayers across the state may wish to review both their real and personal property assessments or factored base year value. Under California law, property may not be assessed at a value greater than its fair market value. If property is being over-assessed, taxpayers may be able to protect their rights and file timely appeals with the local assessment appeals board or county board.

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Limitations for Charitable Deductions and SALT Credits

Posted in Charitable Planning, IRS, State Tax, Tax Cuts and Jobs Act, Tax Planning

The Tax Cuts and Jobs Act (TCJA) placed a $10,000 annual limit on the deductibility of state and local taxes (SALT). In response to and attempting to work around that limitation, several states enacted programs that create charitable entities, contributions to which would entitle the donor to a credit reducing their property tax. This would reduce the amount of SALT paid by a taxpayer and allow the full deduction of the charitable contribution. New York’s legislation allows a credit of 85 percent of the amount donated to the charity; New Jersey’s law provides for a credit of 90 percent of the donated amount. The idea behind these statutes is to permit a taxpayer to deduct the entire amount of the donation and reduce their property tax substantially and, it was hoped, stay within the $10,000 federal SALT limitation.

On Thursday, Aug. 23, 2018, the IRS proposed regulations to substantially eliminate the benefit of such charitable donations. The proposed regulations require the charitable donation to be reduced by the SALT benefit received. For example, if $1,000 is contributed to the charity, and the state provided a 90 percent credit, the charitable donation would be reduced by the $900 credit, and only $100 would be available as a charitable deduction for federal tax purposes.

The proposed regulation provides a de minimis exception where the SALT credit is less than 15 percent of the amount donated. In that circumstance, the full charitable donation will be allowed for federal tax purposes.

The IRS proposed regulation is open for comments that may or may not be adopted by the IRS. Once the regulation is final, it is likely to be challenged in court by the states that enacted the workaround and other states that had similar programs that predated the TCJA such as Arizona that has provided a credit for contributions to certified school tuition organizations since 2013. Taxpayers should watch developments closely and consult with their tax advisors when considering such a contribution.

Applicable Federal Rates and Code Section 7520 Rate for September 2018 – Trending Up Again

Posted in Applicable Federal Rates (AFRs), Estate, Estate Planning, Estate Tax, Gifts, Internal Revenue Code, IRS, Legacy Planning, Tax Planning

The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the following month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances, and should be undertaken only with the advice of competent tax counsel and financial advisors.

The IRS has issued Revenue Ruling 2018-23, which provides the AFRs and 7520 rate for September 2018. Revenue Ruling 2018-23 will appear in Internal Revenue Bulletin 2018-36 dated Sept. 4, 2018.

What is the Applicable AFR? The applicable AFR is the minimum acceptable or safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences – based on the month in which the loan is made, how frequently interest is compounded, and the length or term of the loan.

AFRs Trending Up. Following a slight decrease in the mid-term and long-term rates in August 2018, AFRs increased across the board in September 2018 – making intra-family loans and installment sales to grantor trusts generally less attractive.

2018 AFRs. The AFRs for January through September 2018 are as follows, in reverse chronological order:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
June 2018 2.34% 2.33% 2.32% 2.32%
May 2018 2.18% 2.17% 2.16% 2.16%
April 2018 2.12% 2.11% 2.10% 2.10%
March 2018 1.96% 1.95% 1.95% 1.94%
February 2018 1.81% 1.80% 1.80% 1.79%
January 2018 1.68% 1.67% 1.67% 1.66%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
June 2018 2.86% 2.84% 2.83% 2.82%
May 2018 2.69% 2.67% 2.66% 2.66%
April 2018 2.72% 2.70% 2.69% 2.68%
March 2018 2.57% 2.55% 2.54% 2.54%
February 2018 2.31% 2.30% 2.29% 2.29%
January 2018 2.18% 2.17% 2.16% 2.16%
Long-Term AFRs – For notes with a term in excess of nine years.
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%
June 2018 3.05% 3.03% 3.02% 3.01%
May 2018 2.94% 2.92% 2.91% 2.90%
April 2018 3.04% 3.02% 3.01% 3.00%
March 2018 2.88% 2.86% 2.85% 2.84%
February 2018 2.66% 2.64% 2.63% 2.63%
January 2018 2.59% 2.57% 2.56% 2.56%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income, gift, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate Trending Up. While the 7520 rate increased during the beginning of 2018 — making planning techniques like qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) increasingly attractive. Conversely, grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) have become generally less attractive as a result of this upward trend – it has remained at 3.40% since June 2018.

2018 7520 Rates. The 7520 rates for January through September 2018 are as follows, in reverse chronological order:

7520 RATE
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%
June 2018 3.40%
May 2018 3.20%
April 2018 3.20%
March 2018 3.00%
February 2018 2.80%
January 2018 2.60%

IRS Disclosure Rules for Some Exempt Organizations Changed

Posted in Internal Revenue Code, IRS

On July 17, 2018, the Treasury Department issued new guidance for certain tax exempt organizations. The guidance pertains to the disclosure of the names and addresses of donors to organizations exempt from federal income taxes under Section 501(c) of the Code, other than organizations exempt from taxes under Section 501(c)(3) (generally charities, religious organizations, and schools) or political organizations exempt under Section 527. Organizations to which the guidance applies will no longer be required to report the names and addresses of donors to the IRS, unless the IRS determines this information is required from a specific organization.

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Applicable Federal Rates and Code Section 7520 Rate for August 2018

Posted in Applicable Federal Rates (AFRs), Internal Revenue Code

The applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month are published by the Internal Revenue Service (IRS) in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the rates for the future month provides a window of opportunity for the quick or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. The effective implementation and management of interest-sensitive estate planning techniques also involves numerous other factors in addition to the relevant AFR or 7520 rate, including a client’s particular circumstances, and should be undertaken with the advice of competent tax counsel and financial advisors.

 

The IRS has issued Revenue Ruling 2018-21, which provides the AFRs and 7520 rate for August 2018.

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Supreme Court Internet Sales Tax Case Will Require Many Companies to File State Corporate Income Tax Returns – Even If They Are Not Subject to Sales Tax

Posted in Income Tax, State Tax

Although the sales tax collection obligation of online retailers was the focus of last month’s momentous U.S. Supreme Court case South Dakota v. Wayfair, it will also impact state corporate and income tax obligations. Companies may now be exposed to state income tax as a result of the Wayfair case and should examine their activities in the states and may wish to consider entering into a voluntary disclosure agreement with these states.

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