Estate Planning
for Financial Planners
Chapter 7:
Transfers During Life and at
Death
© 2007 ME™ (Your Money Education Resource™)
2
Arm’s-Length Transactions
 Sale – direct transfer of property from
one person to another for money or
property of equal value.
 Installment sale – note from buyer to
seller.
 Strangers will usually have interest rate;
related parties may usually have
imputed rate.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
3
Lifetime Transfers
 Installment sales
 Keeps post-sale appreciation out of
estate
 Seller receives each year:
 Interest income: rate?
 Return of basis: not taxed
 Capital gain
 What if had capital loss?
 Could they gift proceeds back to buyer?
 Gift at time of sale?
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
4
Transfers Not Subject to Gift
Tax




Legal Support
Qualified Transfers
Transfer to Spouses
Some Below-Market Rate Loans
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
5
Lifetime Transfers
 Intrafamily loans
 Should be in writing
 Really expect repayment?
 Record second mortgage
 Should be arm’s length
 If terms are favorable to borrower
 Reaction of siblings?
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
6
Lifetime Transfers
 Intrafamily loans (market rate)
 Interest received: taxable income
 Interest paid: generally not deductible
unless
 Funds used in business
 Or secured by home
 If borrower defaults:
 Borrower has income unless bankrupt
 Lenders can only deduct loss if try to
foreclose
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
7
Gifts Outright and in Trust
 Can be used to:
 Utilize annual exclusion.
• Present interest?
 Remove future appreciation.
 Reduce gross estate.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
8
Partial Sale-Gift Transactions
 Sell an asset for less than the fair
market value.
 The difference between the Fair
Market Value and the sale price will
be a gift.
 Why do this?
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
9
Full Consideration
Transfers/Sales
 Private Annuities
 Transaction between two private (but usually
related) parties.
 Unsecured promise from the buyer to make
payments to the annuitant for the remainder of the
annuitant’s life.
 Effective when the actual life expectancy is less than
the IRS life expectancy table.
 Removes asset from estate
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
10
Full Consideration
Transfers/Sales
 Private Annuities
 Used when the seller is in poor health.
Each payment includes a recovery of basis
 Basis per payment = basis/expected return
Capital gain based on asset transferred
 See example on Page 233-234
Ordinary income
 Remainder of payment
 Can’t be terminally ill…but if the seller lives > 18
months then it is presumed that the annuitant was
not terminally ill.
 Risk that the seller/annuitant will live longer!
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
11
Full Consideration
Transfers/Sales
 SCIN
 Secured installment sale with payments of
interest and principal over term.
 Again removes asset from estate
 Replaced with some sales proceeds
 SCIN premium paid to cancel note at seller’s
death.
 No gift if the PV of the note is = to the value of
the underlying property & the SCIN premium is
appropriate.
 Interest can be deductible to buyer
 Used when the seller is in poor health.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
12
SCIN vs. Private Annuity
 See Exhibit 7.4, page 226.
Feature
SCIN
Private Annuity
Term of payment
Determined by seller
Life of Annuitant
Deductibility of
interest
Depends on Property
None
Buyer’s ATB
Purchase Price of
Property
Sum of Annuity
Payments Paid
Collateral interest
Yes
No
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
13
Grantor Retained Annuity Trust
(GRAT)
 Pays fixed annuity to grantor for defined term.
 Remainder to noncharitable beneficiary at the end of
term. Often child.
 Moves asset out of estate if outlive term
 Gift = PV of remainder interest.
 Qualify for exclusion?
 Longer term of annuity, smaller value of remainder
interest
 If grantor dies during term, then value of trust is
included in gross estate, so no tax saved.
 Use property that is expected to appreciate at a rate
greater than the IRC Sec 7520 rate.
 Risk – grantor dies too early.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
14
Grantor Retained UniTrust
(GRUT)
 Similar to GRAT except pays fixed
percentage of assets each year that
are revalued on an annual basis.
 Not suitable for hard to value assets.
 Used very infrequently.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
15
Qualified Personal Residence
Trust (QPRT)
 Form of GRAT for personal residence.


Grantor receives use of the house transferred.
Ideal if house is appreciating faster than the IRC Sec 7520
rate and family plans to keep home.
 Use in Mattoon?
 No step up in basis

Gift = PV of the remainder interest.
 Outlive term,


Grantor must begin pay FMV rent to remainderman
Home is removed from estate
 If Grantor dies during term then included in Grantor’s
Gross Estate.
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06
16
Family Limited Partnerships
(FLP)
 Partnership created to transfer assets to the younger
generation


Parents: 1% general partner
Limited partners: 99% owners
 Gift these to children (make use of annual exclusion)
 Take advantage of business discounts


Minority
Marketability
 Use when transferor is intent on gifting while maintaining
control


Protects family business from heirs’ creditors, charming exspouses
IRS has challenged FLPs that didn’t observe business
formalities
© 2007 ME™ (Your Money Education Resource™)
Updated on 12/12/06