Sale of an Income
Producing Asset To A
Grantor Trust
Prepared for
Mr. & Mrs. James Smith
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.
A Potential Solution
• Sell an income producing asset to a Irrevocable Life
Insurance Trust (ILIT) that is “defective” for income tax
purposes.
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
How It Works
Receives Interest
Payments on Note
Trust Pays
Insurance
Premiums
Grantor
Sells Assets
Gift Seed %
Grantor
Trust
Life Insurance
Policy
Current Situation
$10,223,094
of Capital Assets
and Gifts Held in Estate
Value of Capital Assets and Gifts
Year 11
$24,667,662
IRS
Estimated Taxes
Paid by Grantor
$12,333,831
Net Value to Heirs
$12,333,831
Proposed Plan – Year 11
Mr. James
Magner & Mrs.
Magner
$10,000,000
of Capital Assets Transferred to Grantor Trust
Interest Payments to Grantor = $3,187,755
Grantor Trust
Cash Gifts to Grantor Trust = $223,094
Promissory Note
$6,723,094
Note Repayment @ Beg.
of Year 11 $6,723,094
John Hancock
Total Insurance
Premiums Paid
$2,454,034
Death Benefit
$10,000,000
Net Cash Flow from Estate
$2,029,505
Estimated Income Taxes
Paid by Grantor
$2,029,505
Value of
Capital Assets and Gifts To
Heirs
$17,910,427
Total Trust Balance
to Heirs
$29,939,933
Thousands
Comparison of Benefits to Heirs
50,000
Net Increase to Heirs
from Planning
Net Increase to Heirs
from Planning
$21,987,115
$20,575,950
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Pay Off Year
Without Planning
Focus Year
With Planning
Initial Setup of Transfer
Assets Sold to Grantor Trust
Fair Market Value
$10,000,000
Less: Initial Asset Gift to Grantor Trust as Seed
$1,035,875
Fair Market Value After Initial Gift
$8,964,125
Actual Value of Assets Sold To Grantor Trust (30.0%)
Seed Assets & Cash as Gifts
Initial Asset Gift to Grantor Trust as Seed (30.0%)
Cash Gifts to Grantor Trust
Discounted Value of Seed for Gift Tax Purposes
$6,723,094
Actual
Discounted
$1,035,875
$776,906
$223,094
$223,094
$1,000,000
Comparison of Benefits
Sale Assets
Retain Assets
Impact on Estate in year 11
Value Included in the Estate
Less: Estate Tax Due
-$9,083,583
$47,140,486
$0
-$23,570,243
Net Value in Grantor Trust
$44,640,941
Life Insurance Death Benefit
$10,000,000
Net to Heirs after Estate Tax
$45,557,359
Estate Tax Savings Due to Planning
$23,570,243
Increase to Heirs Due to Planning
$21,987,115
$23,570,243
Comparison of Benefits
Sale Assets
Retain Assets
Impact on Estate in year 17
Value Included in the Estate
Less: Estate Tax Due
-$3,874,171
$38,268,991
$0
-$19,134,495
Net Value in Grantor Trust
$33,584,617
Life Insurance Death Benefit
$10,000,000
Net to Heirs after Estate Tax
$39,710,445
Estate Tax Savings Due to Planning
$19,134,495
Increase to Heirs Due to Planning
$20,575,950
$19,134,495
Benefits
• Minimal or no gift tax
• Heirs receive loan repayment
• Minimal risk
• No income tax on loan interest payment with “Grantor
Trust”.
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
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
Disclaimer
This seminar is for Broker-Dealer Use Only. Not for use with the general public. It is
intended to be accurate and authoritative in regard to the subject matter covered. It
is presented with the understanding that I am not engaged in rendering legal or tax
advice. Ogilvie Security Advisors Corp and Gentry Partners Ltd., provides the
sales concepts discussed for informational purposes only. While this seminar
discusses general tax aspects and concepts of planning with insurance, we make
no representations as to suitability for individual clients. Interested parties should
be strongly encouraged to seek separate tax and legal advice before implementing
a plan of the type described in this presentation. Any discussion pertaining to taxes
in this communication (including attachments) may be part of a promotion or
marketing effort. As provided for in government regulations, advice (if any) related
to federal taxes that is contained in this communication (including attachments) is
not intended or written to be used, and cannot be used, for the purpose of avoiding
penalties under the Internal Revenue Code. Individuals should seek advice based
on their own particular circumstances from an independent tax advisor.