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“Sale to a Grantor Trust” Planning

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There are many great estate planning opportunities available with the current low interest rate environment, one of which is the “Sale to a Grantor Trust” technique. This type of transaction takes advantage of low interest rates while also reducing estate tax exposure by shifting future appreciation outside of the taxable estate. This is best explained by way of example (with certain legal and technical details intentionally omitted):

Dad creates an irrevocable trust and names his spouse and descendants as beneficiaries. The trust is designed as a “grantor trust” so that Dad and the trust are the same taxpayer for income tax purposes.

Dad also creates a limited liability company (LLC) and transfers to it a commercial property and stocks that total $1 million.

Next, Dad sells his $1 million of LLC units to the trust in exchange for a $1 million promissory note with a 9-year payment term and a 2.80% interest rate (the August 2018 mid-term AFR). Since Dad and the trust are the same taxpayer, no capital gains or income taxes are due from the sale.

After the sale, Dad owns the note and the trust owns the LLC units. The trust pays Dad the interest and principal on the note over the 9-year payment term. If, over the 9 years, the property and stocks owned by the LLC appreciate more than the 2.80% interest rate, the family benefits. This is because the excess amount is retained in the trust and excluded from Dad’s taxable estate.

If the LLC assets appreciate at a compounded 7% rate over the 9-year term, that excess could be over $300,000! The benefits of this structure can be increased even further with discount planning, Dad’s payment of the income taxes and more efficient promissory note structuring.

Since we cannot predict when interest rates will rise, which would reduce the benefit of this type of transaction, now is the time to take advantage of this opportunity. We are available to discuss your specific situation regarding any wealth transfers, including a sale to grantor trust transaction, and what steps you can take to minimize your estate tax exposure.

For more information on how we can assist you, please contact any of our estate planning attorneys at 847-382-9130.

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