MAKING THE TRANSFER – AND KEEPING ASSETS OUT OF THE GRANTOR’S ESTATE
When drafting the trust provisions, it is essential that no power or authority be retained by the grantor that might cause the assets inside the trust to be brought back into his or her estate for estate tax purposes. When the grantor transfers assets into the trust, the transfer is structured as a bona fide sale.
The fact that a sale has occurred removes the assets from the donor’s estate and avoids having the transfer treated as a gift subject to federal gift tax. The sale effectively “freezes” the value of the asset and removes any future appreciation from the donor’s estate.
INSTALLMENT NOTE
In exchange for the assets sold to the trust, the grantor receives an installment note of equal value from the trust. The installment note may provide for regular payments of both principal and interest or for interest-only payments with a balloon payment at the end of a specified period of time. Substantial estate tax savings can be achieved if growth in the value of trust assets exceeds the interest paid to the grantor under the installment note.
“SEED” MONEY
Prior to the sale, a grantor will frequently transfer other assets into the trust equal to between 10% - 20% of the assets to be sold. This transfer is subject to gift tax and serves to ensure that the trust has sufficient income to make the projected installment payments.
VALUATION DISCOUNTS
In some situations, the assets to be sold to the trust may first be placed in a business structure, such as a family limited partnership or limited liability company, where valuation discounts for factors such as marketability or lack of control may apply. This can allow the grantor to increase the value of the trust for the beneficiaries.
CAPITAL GAINS
Because the grantor and the trust are treated, for income tax purposes, as one and the same, the grantor can sell assets to the trust without recognizing any gain on the sale.
Anyone seeking to utilize an IDGT should consult with a legal professional to determine if the tool is a good fit for their particular planning situation.
Bradley Barth is a partner and Supervising Attorney of the firm’s Transactional and Estate Planning Department encompassing business formations and transactional matters, estate planning, domestic and offshore asset protection, probate, trust administration, tax and real estate law. He views his role as a trusted and long-term advocate of asset protection planning in helping his clients achieve and protect their financial goals and lifetime accomplishments. BRADLEY BARTH, ESQ. Partner BarthCalderon, LLP (714) 704-4828 ext. 114 For a complimentary planning assessment contact paul@barthattorneys.com
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