Sale of an Income Producing Asset To A Grantor Trust

1
Sale of an Income Producing Asset To A Grantor
Trust

• Prepared for
• Mr. Mrs. James Smith

2
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.

3
A Potential Solution

• Sell an income producing asset to a Irrevocable
  Life Insurance Trust (ILIT) that is defective
  for income tax purposes.

4
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

5
How It Works
Receives Interest Payments on Note
Trust Pays Insurance Premiums
Grantor
Sells Assets
Gift Seed
Grantor Trust
Life Insurance Policy
6
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
Net Value to Heirs 12,333,831
Estimated Taxes Paid by Grantor 12,333,831
7
Proposed Plan Year 11
10,000,000 of Capital Assets Transferred to
Grantor Trust
Mr. James Magner Mrs. Magner
Grantor Trust
Interest Payments to Grantor 3,187,755
Cash Gifts to Grantor Trust 223,094
Promissory Note 6,723,094
Total Insurance Premiums Paid 2,454,034
John Hancock
Note Repayment _at_ Beg. of Year 11 6,723,094
Value of Capital Assets and Gifts To
Heirs 17,910,427
Death Benefit 10,000,000
Total Trust Balance to Heirs 29,939,933
Net Cash Flow from Estate 2,029,505
Estimated Income Taxes Paid by Grantor 2,029,505
8
Comparison of Benefits to Heirs
Net Increase to Heirs from Planning 21,987,115
Net Increase to Heirs from Planning 20,575,950
9
Initial Setup of Transfer
Assets Sold to Grantor Trust Assets Sold to Grantor Trust
Fair Market Value 10,000,000 10,000,000
Less Initial Asset Gift to Grantor Trust as Seed 1,035,875 1,035,875
Fair Market Value After Initial Gift 8,964,125 8,964,125
Actual Value of Assets Sold To Grantor Trust (30.0) 6,723,094 6,723,094

Seed Assets Cash as Gifts Actual Discounted
Initial Asset Gift to Grantor Trust as Seed (30.0) 1,035,875 776,906
Cash Gifts to Grantor Trust 223,094 223,094
Discounted Value of Seed for Gift Tax Purposes 1,000,000


10
Comparison of Benefits
Sale Assets Retain Assets
Impact on Estate in year 11 Impact on Estate in year 11 Impact on Estate in year 11
Value Included in the Estate -9,083,583 47,140,486
Less Estate Tax Due 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 23,570,243

Estate Tax Savings Due to Planning 23,570,243

Increase to Heirs Due to Planning 21,987,115

11
Comparison of Benefits
Sale Assets Retain Assets
Impact on Estate in year 17 Impact on Estate in year 17 Impact on Estate in year 17
Value Included in the Estate -3,874,171 38,268,991
Less Estate Tax Due 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 19,134,495

Estate Tax Savings Due to Planning 19,134,495

Increase to Heirs Due to Planning 20,575,950

12
Benefits

• Minimal or no gift tax
• Heirs receive loan repayment
• Minimal risk
• No income tax on loan interest payment with
  Grantor Trust.

13
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 ILITs 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

14
Considerations

• Interest on loan is non-deductible.
• Client pays tax on ILITs 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

15
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.