“Freeze” Your Estate and Shift Wealth Using a Note Sale to an Intentionally Defective Grantor Trust
At this time, unless Congress acts, the current lifetime estate tax exemption amount of $11,580,000 is set to sunset in 2025, which means that in 2026 it will revert to $5,000,000 per person, adjusted for inflation. Many clients want to take advantage of gifting the difference between the amounts, $6,580,000, before it is gone. Some families are making outright gifts to children to purchase a vacation home so they can leave the crowded cities or to start up a new business.
However, in this economic environment, not all clients are ready to make an outright gift but wish they could transfer some of their wealth. Some have already utilized their estate tax exemption amount but wish they could somehow transfer more wealth without incurring a gift tax. Other families still have all or a portion of their estate tax exemption amount, but just don’t feel comfortable transferring funds until the economy sorts itself out.1
This summer, the IRS released record low Applicable Federal Rates (AFR). For September, 2020, the AFRs are:2
- Short term loans (less than 3 years) must bear interest of at least 0.14%
- Midterm loans (more than but less than 9 years) must bear interest of at least 0.35%
- Long term loans (more than 9 years) must bear interest of at least 1.00%
These low rates are providing an opportunity for families that want to transfer wealth, without making gifts or utilizing their estate tax exemption amount. How are they doing it?
People who face significant estate taxes often have highly appreciating assets as part of their estate and could benefit from a strategy that would “freeze” the value of the asset for estate tax purposes and shift all future appreciation of that asset to their heirs.1
One method, which can help to reduce your estate, minimize estate and gift taxes1 and shift appreciation of an asset to your heirs, is a planning strategy that sells your appreciating assets to an Intentionally Defective Grantor Trust (IDGT) via an installment note. IDGTs are irrevocable trusts where income generated by the trust assets is taxed to you, the grantor, even though the assets are excluded from your estate for estate tax purposes. You sell appreciating and/or income producing property to the IDGT using a promissory note.
- The value of the asset sold is ‘frozen’ in your taxable estate at its sales price. Future appreciation of the asset will no longer impact your estate.
- All the future appreciation grows for the benefit of your heirs inside the IDGT, free of gift and estate taxes.
- Gift taxes are minimized because the asset is sold at fair market value, rather than gifted.
- More wealth is created for your heirs when you pay the income taxes generated by the assets now held in the trust (which you would have paid anyway without this strategy). This would have no gift tax consequences. There are many more advantages to you and your heirs.
Contact us to run projections for the investment rate of return, and to determine the required investment needed to pay premiums and interest to outperform the AFR interest rate. As an independent insurance professional, I can help secure competitive pricing for guaranteed insurance products. These products can be designed to be funded over a defined term of years.
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Our mission in the Wealth Management business is to provide you with the clarity, confidence, and commitment to achieve your financial goals, giving you a new-found understanding of how much is possible.
1 Sedway Financial, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
2 https://apps.irs.gov/app/picklist/list/federalRates.html