Due to low interest rates and other planning factors, now is a great time to implement an estate planning opportunity known as a “Sale to a Grantor Trust.” This type of transaction takes advantage of current low rates while also reducing estate tax exposure by shifting future appreciation outside of the taxable estate.
A simplified example of a sale is as follows:
- Dad transfers a rental building and a stock portfolio with a combined value of $5M 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 $5M of LLC units to the trust in exchange for a promissory note. With proper planning, this note may be less than $5M and is payable over 9 years with interest charged at the September 2020 AFR of 0.35%. 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 0.35% interest on Dad’s promissory note, the excess appreciation is excluded from Dad’s taxable estate (plus mom’s and the children’s as well). Assuming a 5% investment return with 0.35% AFR and a combined estate tax rate of 50%, the estimated tax benefit after 9 years is almost $1.3M!
- 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 “perfect storm” of current events allowing strategies such as this to provide maximum benefit to you will not last forever. Tax exemption rates are set to change January 2026, but could be sooner due to mounting federal debt and political climate. Fluctuating interest rates cannot be predicted and could very well rise thereby significantly lowering the benefits of this type of planning.
Now is a great time to consider implementing or revising your estate plan. The attorneys at Kelleher + Holland, LLC 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 this and other estate planning opportunities, please contact Andrew Kelleher, Robert Holland, Vasili Russis or any of our estate planning attorneys at (847) 382-9195 or via email at firstname.lastname@example.org.