Low Interest Rates Create Window of Opportunity
We want to call your attention to the “Sale to a Grantor Trust” planning opportunity that is currently available in this low interest rate environment. Now is a great time to consider implementing this planning.
In order to lower estate tax exposure, one major planning goal is to remove future appreciation of assets from a current taxable estate. A common technique to achieve this goal is a “Sale to a Grantor Trust.” A simplified example of a sale is as follows:
- Dad transfers a rental building and a stock portfolio with a combined value of $1M into a limited liability company (“LLC”) in exchange for LLC units.
- Dad then establishes an irrevocable grantor trust for the benefit of his wife and children (“trust”). The trust is designed as a “grantor trust” so that Dad and the trust are the same taxpayer for income tax purposes.
- Next, Dad sells his $1M of LLC units to the trust in exchange for a $1M promissory note (payable over 9 years with interest charged at the December 2019 mid-term AFR of 1.69%) (the “note”). As Dad and the trust are the same taxpayer, there is no capital gains/income tax on the sale.
- After the sale, Dad owns the note and the trust owns the LLC units.
- If the building and stock portfolio owned by the LLC appreciate at more than the 1.69% interest on Dad’s promissory note, the excess appreciation is excluded from Dad’s taxable estate (and mom’s and the children also). Let’s assume the LLC assets appreciate at a compounded 6% rate over the 9 years, the appreciation excluded from estate tax is over $495,000! Estate tax savings can be further enhanced with valuation discount planning, Dad’s payment of the income taxes and more efficient promissory note structuring.
The applicable interest rates the IRS will allow in a “Sale to a Grantor Trust” for months beyond December 2019 cannot be predicted, however, such interest rates could very well rise thereby significantly lowering the benefits of this planning. So, now is a great time to implement this planning. We are available to discuss your specific situation regarding any wealth transfers, including the 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 Andrew Kelleher, David Buckley or any of our 25+ attorneys at (847) 382-9130 or through our website.