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Historically Low Interest Rates Create Attractive Estate Planning Opportunities

Published on: September 7, 2012 | by John R. Blasi

Today’s low interest rate environment, coupled with generous gift and estate tax exemptions, has made this an ideal time to effectively transfer wealth to heirs. Under the Internal Revenue Code (the “Code”), Section 7520, the Internal Revenue Service (the “IRS”) uses a rate based on 120 percent of the Midterm Applicable Federal Rate to discount the value of an annuity, an income interest for life or a term of years, or a remainder or reversionary interest in a trust to present value (hereinafter referred to as the “7520 Rate”). The IRS published the 7520 Rate (which varies from month to month) for September 2012 in Revenue Ruling 2012-24: the 7520 Rate is at the historically low rate of 1.0%. This presents attractive estate planning opportunities for those interested in the following techniques: (1) Grantor Retained Annuity Trusts (“GRATs”); (2) Charitable Lead Annuity Trusts (“CLATs”); and (3) Intra-Family Loans.

GRATs allow a person to transfer property with high appreciation potential to an irrevocable trust while also retaining the right to receive a fixed annuity payable at least annually for a chosen number of years. At the end of the annuity term, the remaining trust property passes to the grantor’s beneficiaries. The transfer of the property to the GRAT is a gift for gift tax purposes to the extent that the initial value of the trust property exceeds the present value of the grantor’s retained annuity interest for the month the GRAT is created. The present value of the grantor’s retained annuity interest is determined using the 7520 Rate for the month the GRAT is created. If the trust property appreciates at a rate exceeding the 7520 Rate, the grantor will be successful in passing wealth to the beneficiaries free of estate and gift taxes. The catch is that the grantor must survive the annuity term; otherwise, the trust property is included in the grantor’s estate for estate tax purposes at its date-of-death value. The minimum annuity term of a GRAT is currently two years.

Those with charitable impulses may want to consider using CLATs. Under the terms of a CLAT, a charity receives annuity payments for the term of the trust; at the end of the term, the balance of the property remaining in the CLAT passes to one or more non-charitable beneficiaries (e.g., the children of the donor). The annuity amount is valued by assuming that the charity’s lead interest will earn a rate equal to the 7520 Rate for the month the donor funds the CLAT. Accordingly, donors also benefit from a CLAT in a low interest rate environment because the investment performance must exceed only the 7520 Rate to result in the passing of wealth without estate and gift taxes; while outside the scope of this alert, there are Generation-Skipping Transfer Tax implications if the non-charitable beneficiaries include certain related individuals (e.g., grandchildren of the donor).

Now may also be the time to consider making intra-family loans (or to renegotiate existing loans to the current lower rate) to family members who, in turn, can invest the borrowed funds and earn a greater amount than the interest rate on the loan. To avoid imputed income, a family member is typically required to pay interest on the loan. Section 7872 of the Code provides that you may make loans to family members at the Applicable Federal Rate (“AFR”) compounded annually (hereinafter referred to as the “7872 Rate”). With respect to term loans, the 7872 Rate is 0.21% for a loan of 3 years or less; .84% for a loan greater than 3 years and less than 9 years; and, 2.18% for loans greater than 9 years. Demand loans – loans payable in full at any time on demand of the lender – should typically have an interest at least equal to the Short-Term AFR (0.21%), compounded semiannually, for the period in which the loan is outstanding. The IRS also provides a blended annual rate (currently 0.22%) for demand loans with a fixed principal amount outstanding during the entire calendar year.

These are very low minimum required interest rates, and your family member may use the borrowed funds to earn a higher return than the low interest rate due on your promissory note. You may also use your annual gift tax exclusion (currently $13,000 per individual and $26,000 per married couple) to forgive a portion of the principal over time. In addition to properly structuring and documenting the loan in writing, the parties must adhere to the terms of the loan; otherwise, the loan may be recharacterized as a taxable gift.

Notably, factors other than the current low interest rate environment should be considered in your estate planning. For example, for many taxpayers it makes more sense to simply transfer wealth through outright gifts because the current exclusion amount is $5.12 million per individual and $10.24 million per married couple. In addition, depressed real estate markets may provide an opportunity for certain individuals to implement a qualified personal residence trust (“QPRT”) that freezes the value of real property at the time an irrevocable trust is created. The terms of a QPRT allow the donor to convey a personal residence and/or vacation home to the trust and retain the right to live in it for a term of years.

For additional information or assistance in using GRATs, CLATs, intra-family loans, QPRTs, and other tools in your estate planning, please contact one of the Estate Planning attorneys at Lindabury, McCormick, Estabrook & Cooper, P.C.

New NLRB Report Stymies Employers’ Efforts to Reign in Employee Social Networking Activities

Published on: August 31, 2012 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

The prevalence of social media in today’s workplace is undisputed. With the lack of discretion often displayed on social media sites such as Facebook, it is no wonder employers seek to control inappropriate employee communications and the unauthorized dissemination of confidential employer information through policies restricting employee social networking activities. The National Labor Relations Board (the “Board”), however, has issued a new social media report that sets forth substantial limitations on employers’ efforts to regulate social networking activities. More important, the report puts employers on notice that most workplace social medial policies will be deemed in violation of the federal labor law if subject to the scrutiny of the Board.

In its May 30, 2012, Report of the Acting General Counsel Concerning Social Media Cases (“the Report”), the Board analyzed provisions of numerous social networking policies that, according to the Board, constitute impermissible restraints on rights accorded employees under Section 7 of the National Labor Relations Act (the “NLRA”) to freely discuss the terms and conditions of employment with fellow employees. In general, the Report suggests that the mere existence of a social media policy that could reasonably be construed by employees “to chill the exercise of Section 7 rights” is a violation of the NLRA. This would be the case even if the employer has not invoked the policy to discipline employees for social networking activities. Thus, the Board cautioned that social media policies should be narrow in their scope and clearly carve out protected discussions among employees concerning wages and benefits, discipline, working conditions and other the terms and conditions of employment.

Until recently, many of us would not have questioned a policy putting employees on notice that they may be subject to discipline for posting disparaging or defamatory remarks about the company and its employees. However, employers may be stunned to learn that such standard provisions are among those that the Board will view as impermissible under the NLRA. While the Report provides numerous additional examples, the following provisions deemed unlawful by the Board are illustrative of the Board’s expansive view of Section 7 rights.

Blanket prohibitions on revealing non-public, confidential or proprietary company information and/or personal information about co-worker, such as his or her medical condition, performance, compensation or status in the company.
Instructions that employees’ posts must be “completely accurate and not misleading.”
Proscribing online “offensive, demeaning, abusive or inappropriate remarks” and communications that would be “inappropriate in the workplace” without specifying that the prohibition is limited to comments directed at an individual on the basis of age, gender, disability or other legally protected status.
Discouraging employees from “friending” co-workers.
Encouraging employees to resolve their concerns in person and through internal resources.

In each of the foregoing examples, the Board found that employees could construe these provisions to prohibit criticism of the employer’s labor policies, treatment of employees, and other protected discussions about wages and terms and condition of employment.

The Board also concluded that a general savings clause advising employees that the policy will not be applied to any employee communications protected under Section 7 will not cure any otherwise overbroad and ambiguous provisions of a social media policy. Only the inclusion of specific limiting language or context that would dispel any interpretation that the employer’s social networking guidelines capture Section 7 communications will save the rule. The following are some of the examples of social media rules the NLRB suggested would be acceptable:

Provisions prohibiting bullying, harassment or discrimination, so long as the provision expressly provides that the prohibited communications are limited to those that are meant to intentionally harm one’s reputation or those that could create a hostile environment on the basis of race, sex, disability, religion or other status protected by anti-discrimination laws.
Restrictions on unauthorized use of postings that are made in the name of or attributable to employer.
Exhortations to be respectful, fair and courteous in the posting of comments, complaints, photographs or videos, when accompanied by examples of egregious conduct that is not permitted.
Rules requiring employees to maintain confidentiality of trade secrets and private and confidential information, so long as the policy provides sufficient examples for employees to understand that it does not reach protected communications about working conditions.

Additional examples of overbroad social media provisions and a sample social media policy acceptable to the NLRB are contained in the Report available at the NLRB’s website.

It is important to note that the Report does not rise to the level of an enforceable regulation. Nevertheless, the takeaway from the Report is that most social networking policies implemented by employers to protect legitimate business interests would be viewed as an impermissible hindrance of employee rights under the NLRA should the policy come into the crosshairs of the Board. Policy language regarding social media must be specific so that it cannot reasonably be construed as limiting an employee’s right to discuss any terms and conditions of his/her employment. To ensure your social media policy falls within the parameters of the Board’s guidelines or for assistance in developing a social media policy that effectively protects the employer while not limiting the rights of its employees, contact your employment attorney.

PENDING NJ BILLS WOULD FURTHER RESTRAIN EMPLOYER’S EFFORTS TO MONITOR SOCIAL NETWORKING ACTIVITY

A bill prohibiting employers from requiring current or prospective employees to disclose their user name, password, or in any way grant the employer access to personal accounts or services through electronic communications was introduced in the New Jersey Senate (S1915) and Assembly (A2878) in early May 2012. The bill passed in the Assembly and will be taken up by the Senate in the fall . . . stay tuned for further developments.

The NLRB Strikes Again! The Board Continues to Flex Its Muscles in the Non-Unionized Workplace

Published on: January 13, 2012 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Employment Law Newsletter

The NLRA posting requirement discussed above is only one of several recent actions taken by the NLRB that serve as a sober reminder that even in non-unionized workplaces, private sector employees have statutory rights under Section 7 of the NLRA to engage in concerted activity for, among other things, “mutual aid and protection.”

In its January 3, 2012, ruling in (NLRB Case 12-CA-25764), the Board considered whether a requirement that employees execute arbitration agreements that waived employees’ rights to any judicial forum in favor of arbitration, and further, prohibited the arbitrator from fashioning a collective or class action, violated employees’ Section 7 rights to engage in concerted action for mutual aid and protection. The Board concluded that such arbitration agreements unlawfully restrict employees’ rights to collectively pursue employment-related claims, notwithstanding the Federal Arbitration Act (FAA), which generally makes employment-related arbitration agreements judicially enforceable. Some commentators view this decision as a repudiation of the U.S. Supreme Court’s 2011 decision in , which held that the FAA pre-empted California state law barring arbitration agreements from prohibiting class-action lawsuits.

Under this ruling, employers remain free to enter into mandatory arbitration agreements, so long as the agreement carves out an exception permitting employees to pursue group claims in a judicial or other forum. Employers should review their arbitration agreements with employment law counsel to assess how the NLRB’s ruling affects the enforceability of those agreements.