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Sale of an Income Producing Asset To A Grantor Trust

The Concern. Your estate will be subject to estate tax at death.Making lifetime gifts may result in gift

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Sale of an Income Producing Asset To A Grantor Trust

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    1. Sale of an Income Producing Asset To A Grantor Trust Prepared for Mr. & Mrs. James Smith

    2. The Concern Your estate will be subject to estate tax at death. Making lifetime gifts may result in gift & income taxes. Maintaining control of assets is important. For those with illiquid estates, finding the cash to pay life insurance premiums often is a major concern.

    3. A Potential Solution Sell an income producing asset to a Irrevocable Life Insurance Trust (ILIT) that is “defective” for income tax purposes.

    4. How It Works Establish an ILIT that is defective for income tax purposes. Make a gift of “seed money” to ILIT. Sell discounted asset to ILIT in return for interest-only installment note with principal due at end of note term. Note must charge fair market interest. Income from note can be used to pay interest/principal with excess used to purchase life insurance. See diagram on next slide

    5. How It Works

    6. Current Situation

    7. Proposed Plan – Year 11

    8. Comparison of Benefits to Heirs

    9. Initial Setup of Transfer

    10. Comparison of Benefits

    11. Comparison of Benefits

    12. Benefits Minimal or no gift tax Heirs receive loan repayment Minimal risk No income tax on loan interest payment with “Grantor Trust”.

    13. Benefits Assets transferred out of your estate. Assets sold to ILIT can be “discounted” for lack of marketability and lack of control before sale to ILIT. Sale of asset does not result in recognition of income by seller. Trust does not pay income taxes on ILIT’s income. Excess cash flow trustee receives from asset sold to ILIT can be used to purchase life insurance. The trust can provide asset protection for the ILIT beneficiaries. Favorable IRS Ruling: Revenue Ruling 2004-64

    14. Considerations Interest on loan is non-deductible. Client pays tax on ILIT’s annual income. Potential loss of control of asset. Professional appraiser may be needed to value asset sold to ILIT. Cash flow from asset sold to ILIT must be sufficient to pay loan interest. GSTT exemption allocation may to be made if the ILIT is a “skip trust” that benefits grandchildren and great grandchildren

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