estate planning techniques in a time of low interest rates...2020/07/31 · payment feature...

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Estate Planning Techniques in a

Time of Low Interest Rates:

How To Help Clients Take Advantage of this PERFECT STORM

Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished)

PFP Section

Tax | Retirement | Estate |

Risk Management | Investments


Gift & Estate Tax Planning Opportunities & Disasters in a Volatile,

Low Interest Rate Market

• Taxable gifts and tax-free gifting

• Distributions and sales from a taxable estate to capture the Alternative Valuation Date (AVD)

• Funding GRATs

• IDGT sales

• Refinancing existing installment notes

• Split-dollar strategies

2


May 2020 Rates

Short-Term AFR 0.25%

Mid-Term AFR 0.58%

Long-Term AFR 1.15%

Section 7520

Rate

0.60%

3


June 2020 Rates


Mid-Term AFR 0.43%

Long-Term AFR 1.01%

Section 7520 Rate 0.60%

4


July 2020 Rates


Mid-Term AFR 0.45%

Long-Term AFR 1.17%

Section 7520 Rate 0.60%

5


Overview

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$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

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Estate Tax - Past & Projected - Current Law

Estate Tax Exemption Maximum Rate

6


7


8


Tax Planning & Rates

Lower Rates Favor

• GRATs

• IDGTs sales

• §453 installment sales between related parties

• CLATs

• Private annuities

• Split-dollar life insurance (“loan method”)

Higher Rates Favor

• QPRTs

• GRITs

• CRATs

• Graegin loans

• Farmland alternative valuation

Generally Neutral

• CRUTs

• CLUTs

9


It’s a Balancing Act …

Bet to Live? Bet to Die?

BALANCING BET-TO-LIVE AND

BET-TO-DIE STRATEGIES

10


Key Strategies - Bet-to-Live Strategies

• Lifetime Gifts– Annual Exclusion Gifts– Lifetime Gift Tax Exemption Gifts– Taxable Gifts

• Grantor Retained Annuity Trust (GRAT)

• Dynasty Trust

• Sale To An Intentionally Defective Grantor Trust (IDGT)

11


Key Strategies - Bet-to-Die Strategies

• Self-canceling Installment Note (SCIN)

• Private Annuity

• Charitable Lead Trusts

• Life Insurance

12


Dynasty Trust

Discretionary Distributions

to Children for Life


to Grandchildren for Life


to Great-Grandchildren

for Life

No transfer tax paid.




ParentGift*

Advantages• Creditor protection

• Divorce protection

• Estate tax protection• Direct descendent protection

• Spendthrift protection

• Consolidation of capital

* Gift should take advantage

of any remaining Unified

Credit / GST exclusion

remaining.

Dynasty Trust Strategy Overview

13

Future Generations


Wealth of Parents 10,000,000$ 10,000,000$ 10,000,000$

Estate Tax Rate 40% 40% 40%

Estate Tax 4,000,000$ 4,000,000$ 4,000,000$

Wealth of Children 6,000,000$ -$ -$


Estate Tax 2,400,000$ -$ -$

Wealth of Grandchildren 3,600,000$ 6,000,000$ -$


Estate Tax 1,440,000$ 2,400,000$ -$

Wealth of Great-Grandchildren 2,160,000$ 3,600,000$ 6,000,000$

% of Original Wealth Passing to

Great-Grandchildren 21.6000% 36.0000% 60.0000%

* For sake of simplicity, it is assumed that the marginal estate tax rate at each generation’s death is 40%.

Dynasty Trust Strategy Overview

14


Transfer of assets

Annuity payments over a

fixed term

Payment of gift tax on present

value of remainder interest transferred to children

(should be at or near $0)

At end of term, any residual

assets remaining in the trust pass to the children

free of any gift tax

* Instead of naming the children as outright remainder beneficiaries of the GRAT, a grantor trust could be used

(thus producing a greater estate tax benefit)

Grantor(Lead Beneficiary)

IRS

GRAT

Grantor’s

Children(Remainder

Beneficiaries)

Grantor Retained Annuity Trust (GRAT)

15


BENEFIT: $14,409,770 Transferred to Beneficiaries Tax-Free

Year

Beginning

Balance

Taxable

Income

Annuity

Payment Ending Balance

10.00% $723,307

1 10,000,000$ 1,000,000$ (723,307)$ 10,276,693$

2 10,276,693$ 1,027,669$ (723,307)$ 10,581,055$

3 10,581,055$ 1,058,105$ (723,307)$ 10,915,853$

4 10,915,853$ 1,091,585$ (723,307)$ 11,284,131$

5 11,284,131$ 1,128,413$ (723,307)$ 11,689,237$

6 11,689,237$ 1,168,924$ (723,307)$ 12,134,853$

7 12,134,853$ 1,213,485$ (723,307)$ 12,625,031$

8 12,625,031$ 1,262,503$ (723,307)$ 13,164,227$

9 13,164,227$ 1,316,423$ (723,307)$ 13,757,343$

10 13,757,343$ 1,375,734$ (723,307)$ 14,409,770$

* Assuming a $7,000,000 (after valuation adjustments) initial contribution

GRAT

§ 7520 Rate 0.6%

Why a GRAT Works

16


BENEFIT: $9,469,346 of additional wealth is transferred to

beneficiaries tax-free. $3,434,288 is due to the rate differential and $6,035,058 is due to taxes paid by the grantor.

Year

Beginning

Balance

Taxable

Income

Annuity


0.80% $1,033,296

1 10,000,000$ 80,000$ (1,033,296)$ 9,046,704$

2 9,046,704$ 72,374$ (1,033,296)$ 8,085,781$

3 8,085,781$ 64,686$ (1,033,296)$ 7,117,172$

4 7,117,172$ 56,937$ (1,033,296)$ 6,140,813$

5 6,140,813$ 49,127$ (1,033,296)$ 5,156,643$

6 5,156,643$ 41,253$ (1,033,296)$ 4,164,600$

7 4,164,600$ 33,317$ (1,033,296)$ 3,164,621$

8 3,164,621$ 25,317$ (1,033,296)$ 2,156,642$

9 2,156,642$ 17,253$ (1,033,296)$ 1,140,599$

10 1,140,599$ 9,125$ (1,149,724)$ -$

Year

Beginning

Balance

Taxable

Income

Annuity


10.00% $1,033,296.09

1 10,000,000$ 1,000,000$ (1,033,296)$ 9,966,704$

2 9,966,704$ 996,670$ (1,033,296)$ 9,930,078$

3 9,930,078$ 993,008$ (1,033,296)$ 9,889,790$

4 9,889,790$ 988,979$ (1,033,296)$ 9,845,473$

5 9,845,473$ 984,547$ (1,033,296)$ 9,796,724$

6 9,796,724$ 979,672$ (1,033,296)$ 9,743,100$

7 9,743,100$ 974,310$ (1,033,296)$ 9,684,114$

8 9,684,114$ 968,411$ (1,033,296)$ 9,619,230$

9 9,619,230$ 961,923$ (1,033,296)$ 9,547,856$

10 9,547,856$ 954,786$ (1,033,296)$ 9,469,346$

GRATWhy a GRAT Works – Rate Differential

§ 7520 Rate 0.6%

17


BENEFIT: $4,940,424 Additional Wealth Transferred to

Beneficiaries Tax-Free

Year

Beginning

Balance

Taxable

Income

Annuity


10.00% $1,033,296

1 10,000,000$ 1,000,000$ (1,033,296)$ 9,966,704$

2 9,966,704$ 996,670$ (1,033,296)$ 9,930,078$

3 9,930,078$ 993,008$ (1,033,296)$ 9,889,790$

4 9,889,790$ 988,979$ (1,033,296)$ 9,845,473$

5 9,845,473$ 984,547$ (1,033,296)$ 9,796,724$

6 9,796,724$ 979,672$ (1,033,296)$ 9,743,100$

7 9,743,100$ 974,310$ (1,033,296)$ 9,684,114$

8 9,684,114$ 968,411$ (1,033,296)$ 9,619,230$

9 9,619,230$ 961,923$ (1,033,296)$ 9,547,856$

10 9,547,856$ 954,786$ (1,033,296)$ 9,469,346$

Year

Beginning

Balance

Taxable

Income

Annuity


10.00% $723,307

1 10,000,000$ 1,000,000$ (723,307)$ 10,276,693$

2 10,276,693$ 1,027,669$ (723,307)$ 10,581,055$

3 10,581,055$ 1,058,105$ (723,307)$ 10,915,853$

4 10,915,853$ 1,091,585$ (723,307)$ 11,284,131$

5 11,284,131$ 1,128,413$ (723,307)$ 11,689,237$

6 11,689,237$ 1,168,924$ (723,307)$ 12,134,853$

7 12,134,853$ 1,213,485$ (723,307)$ 12,625,031$

8 12,625,031$ 1,262,503$ (723,307)$ 13,164,227$

9 13,164,227$ 1,316,423$ (723,307)$ 13,757,343$

10 13,757,343$ 1,375,734$ (723,307)$ 14,409,770$

GRAT

Why a GRAT Works – Valuation Adjustments

§ 7520 Rate 0.6%

18




Year

Beginning

Balance

Taxable

Income

Annuity

Payment Less: Taxes @ Ending Balance

10.00% $723,307 40.00%

1 10,000,000$ 1,000,000$ (723,307)$ (400,000)$ 9,876,693$

2 9,876,693$ 987,669$ (723,307)$ (395,068)$ 9,745,987$

3 9,745,987$ 974,599$ (723,307)$ (389,839)$ 9,607,439$

4 9,607,439$ 960,744$ (723,307)$ (384,298)$ 9,460,578$

5 9,460,578$ 946,058$ (723,307)$ (378,423)$ 9,304,905$

6 9,304,905$ 930,491$ (723,307)$ (372,196)$ 9,139,893$

7 9,139,893$ 913,989$ (723,307)$ (365,596)$ 8,964,979$

8 8,964,979$ 896,498$ (723,307)$ (358,599)$ 8,779,570$

9 8,779,570$ 877,957$ (723,307)$ (351,183)$ 8,583,037$

10 8,583,037$ 858,304$ (723,307)$ (343,321)$ 8,374,712$

Year

Beginning

Balance

Taxable

Income

Annuity


10.00% $723,307 40.00%

1 10,000,000$ 1,000,000$ (723,307)$ -$ 10,276,693$

2 10,276,693$ 1,027,669$ (723,307)$ -$ 10,581,055$

3 10,581,055$ 1,058,105$ (723,307)$ -$ 10,915,853$

4 10,915,853$ 1,091,585$ (723,307)$ -$ 11,284,131$

5 11,284,131$ 1,128,413$ (723,307)$ -$ 11,689,237$

6 11,689,237$ 1,168,924$ (723,307)$ -$ 12,134,853$

7 12,134,853$ 1,213,485$ (723,307)$ -$ 12,625,031$

8 12,625,031$ 1,262,503$ (723,307)$ -$ 13,164,227$

9 13,164,227$ 1,316,423$ (723,307)$ -$ 13,757,343$

10 13,757,343$ 1,375,734$ (723,307)$ -$ 14,409,770$

GRAT

Why a GRAT Works – Grantor-Paid Taxes

§ 7520 Rate 0.6%

19


Reasons for Total Wealth Transferred

Differential Between Rates of Return 3,434,288$

Valuation Adjustment 4,940,424

Income Taxes Paid by Grantor 6,035,058

Total Wealth Transferred 14,409,770$

GRAT

Why a GRAT Works – Summary

§ 7520 Rate 0.6%

20


Payment of

trust income

taxes by the

grantor

Valuation adjustments on

assets transferred

GRAT

Why a GRAT Works – Summary

21

Difference between actual rate of return

and IRC §7520 rate


GRAT

Rate Based Efficacy

7520 Rate 1.00% 2.00% 3.00% 4.00% 5.00%

Rate of Return 7.00% 7.00% 7.00% 7.00% 7.00%

Principal 1,000,000$ 1,000,000$ 1,000,000$ 1,000,000$ 1,000,000$

Term (years) 8 8 8 8 8

Annuity (annual) 130,690$ 136,510$ 142,456$ 148,528$ 154,722$

Remainder 377,330$ 317,623$ 256,612$ 194,320$ 130,771$

Estate Tax Savings (40%) 150,932$ 127,049$ 102,645$ 77,728$ 52,308$

GRAT

22


Intentionally Defective Grantor Trust (IDGT) Sale

An IDGT sale is a transaction whereby a grantor sells a highly-appreciating asset to an IDGT in exchange for an installment note.

To the extent that the growth rate on the assets sold to the IDGT is greater than the interest rate on the installment note taken back by the grantor, the “excess” is passed on to the trust beneficiaries free of any gift, estate and/or GST tax.

No capital gains tax is due on the installment sale to the trust because the trust is “defective” for income tax purposes.

Interest income on installment note is not taxable to the grantor because the trust is “defective” for income tax purposes.

23


Gift & sale of highly-

appreciating assets

Installment note(s)

Discretionary distributions

of income and principal during the lifetime of the

trust’s beneficiaries

Assets outside of the

taxable estates of beneficiaries

Grantor IDGT

Children,

Grandchildren& Future

Generations

IDGT Sale

Overview

24


BENEFIT: $17,810,649 Transferred to Beneficiaries Tax-Free

* Assuming a $7,000,000 (after valuation adjustments) interest only, balloon

payment feature installment note with a 1.01% annual interest rate (long-term AFR)

Year

Beginning

Balance

Taxable

Income Annual

Ending

Balance

10.00% Payment

1 10,000,000$ 1,000,000$ (70,700)$ 10,929,300$

2 10,929,300$ 1,092,930$ (70,700)$ 11,951,530$

3 11,951,530$ 1,195,153$ (70,700)$ 13,075,983$

4 13,075,983$ 1,307,598$ (70,700)$ 14,312,881$

5 14,312,881$ 1,431,288$ (70,700)$ 15,673,469$

6 15,673,469$ 1,567,347$ (70,700)$ 17,170,116$

7 17,170,116$ 1,717,012$ (70,700)$ 18,816,428$

8 18,816,428$ 1,881,643$ (70,700)$ 20,627,371$

9 20,627,371$ 2,062,737$ (70,700)$ 22,619,408$

10 22,619,408$ 2,261,941$ (7,070,700)$ 17,810,649$

IDGT Sale

Long-Term AFR Rate 1.01%

Why an IDGT Sale Works

25


BENEFIT: $14,327,745 of additional wealth is transferred to

beneficiaries tax-free. $6,493,691 is due to the rate differential and $7,807,039 is due to taxes paid by the grantor.

Year

Beginning

Balance

Taxable

Income

Annual


1.01% $ 101,000

1 10,000,000$ 101,000$ (101,000)$ 10,000,000$

2 10,000,000$ 101,000$ (101,000)$ 10,000,000$

3 10,000,000$ 101,000$ (101,000)$ 10,000,000$

4 10,000,000$ 101,000$ (101,000)$ 10,000,000$

5 10,000,000$ 101,000$ (101,000)$ 10,000,000$

6 10,000,000$ 101,000$ (101,000)$ 10,000,000$

7 10,000,000$ 101,000$ (101,000)$ 10,000,000$

8 10,000,000$ 101,000$ (101,000)$ 10,000,000$

9 10,000,000$ 101,000$ (101,000)$ 10,000,000$

10 10,000,000$ 101,000$ (10,101,000)$ -$

Year

Beginning

Balance

Taxable

Income

Annual


10.00% $ 101,000

1 10,000,000$ 1,000,000$ (101,000)$ 10,899,000$

2 10,899,000$ 1,089,900$ (101,000)$ 11,887,900$

3 11,887,900$ 1,188,790$ (101,000)$ 12,975,690$

4 12,975,690$ 1,297,569$ (101,000)$ 14,172,259$

5 14,172,259$ 1,417,226$ (101,000)$ 15,488,485$

6 15,488,485$ 1,548,848$ (101,000)$ 16,936,333$

7 16,936,333$ 1,693,633$ (101,000)$ 18,528,967$

8 18,528,967$ 1,852,897$ (101,000)$ 20,280,863$

9 20,280,863$ 2,028,086$ (101,000)$ 22,207,950$

10 22,207,950$ 2,220,795$ (10,101,000)$ 14,327,745$

IDGT Sale


Why an IDGT Sale Works – Rate Differential

26




Year

Beginning

Balance

Taxable

Income

Annual


10.00% $ 101,000

1 10,000,000$ 1,000,000$ (101,000)$ 10,899,000$

2 10,899,000$ 1,089,900$ (101,000)$ 11,887,900$

3 11,887,900$ 1,188,790$ (101,000)$ 12,975,690$

4 12,975,690$ 1,297,569$ (101,000)$ 14,172,259$

5 14,172,259$ 1,417,226$ (101,000)$ 15,488,485$

6 15,488,485$ 1,548,848$ (101,000)$ 16,936,333$

7 16,936,333$ 1,693,633$ (101,000)$ 18,528,967$

8 18,528,967$ 1,852,897$ (101,000)$ 20,280,863$

9 20,280,863$ 2,028,086$ (101,000)$ 22,207,950$

10 22,207,950$ 2,220,795$ (10,101,000)$ 14,327,745$

Year

Beginning

Balance

Taxable

Income

Annual


10.00% $ 70,700

1 10,000,000$ 1,000,000$ (70,700)$ 10,929,300$

2 10,929,300$ 1,092,930$ (70,700)$ 11,951,530$

3 11,951,530$ 1,195,153$ (70,700)$ 13,075,983$

4 13,075,983$ 1,307,598$ (70,700)$ 14,312,881$

5 14,312,881$ 1,431,288$ (70,700)$ 15,673,469$

6 15,673,469$ 1,567,347$ (70,700)$ 17,170,116$

7 17,170,116$ 1,717,012$ (70,700)$ 18,816,428$

8 18,816,428$ 1,881,643$ (70,700)$ 20,627,371$

9 20,627,371$ 2,062,737$ (70,700)$ 22,619,408$

10 22,619,408$ 2,261,941$ (7,070,700)$ 17,810,649$

IDGT Sale


Why an IDGT Sale Works – Valuation Adjustments

27




Year

Beginning

Balance

Taxable

Income

Annual


10.00% $ 70,700 40.00%

1 10,000,000$ 1,000,000$ (70,700)$ (400,000)$ 10,529,300$

2 10,529,300$ 1,052,930$ (70,700)$ (421,172)$ 11,090,358$

3 11,090,358$ 1,109,036$ (70,700)$ (443,614)$ 11,685,079$

4 11,685,079$ 1,168,508$ (70,700)$ (467,403)$ 12,315,484$

5 12,315,484$ 1,231,548$ (70,700)$ (492,619)$ 12,983,713$

6 12,983,713$ 1,298,371$ (70,700)$ (519,349)$ 13,692,036$

7 13,692,036$ 1,369,204$ (70,700)$ (547,681)$ 14,442,858$

8 14,442,858$ 1,444,286$ (70,700)$ (577,714)$ 15,238,730$

9 15,238,730$ 1,523,873$ (70,700)$ (609,549)$ 16,082,354$

10 16,082,354$ 1,608,235$ (7,070,700)$ (643,294)$ 9,976,595$

Year

Beginning

Balance

Taxable

Income

Annual


10.00% $ 70,700 40.00%

1 10,000,000$ 1,000,000$ (70,700)$ -$ 10,929,300$

2 10,929,300$ 1,092,930$ (70,700)$ -$ 11,951,530$

3 11,951,530$ 1,195,153$ (70,700)$ -$ 13,075,983$

4 13,075,983$ 1,307,598$ (70,700)$ -$ 14,312,881$

5 14,312,881$ 1,431,288$ (70,700)$ -$ 15,673,469$

6 15,673,469$ 1,567,347$ (70,700)$ -$ 17,170,116$

7 17,170,116$ 1,717,012$ (70,700)$ -$ 18,816,428$

8 18,816,428$ 1,881,643$ (70,700)$ -$ 20,627,371$

9 20,627,371$ 2,062,737$ (70,700)$ -$ 22,619,408$

10 22,619,408$ 2,261,941$ (7,070,700)$ -$ 17,810,649$

IDGT Sale


Why an IDGT Sale Works – Grantor-Paid Taxes

28


Reasons for Total Wealth Transferred

Differential Between Rates of Return 6,493,691$

Valuation Adjustment 3,482,904

Income Taxes Paid by Grantor 7,834,054

Total Wealth Transferred 17,810,649$

IDGT Sale


Why an IDGT Sale Works – Summary

29


Difference between actual rate of return and AFR

Payment of trust income

taxes by the grantor

Valuation adjustments on assets sold

Back end-

loading of

installment

payments

IDGT SaleWhy an IDGT Sale Works – Summary

30


• Cancellation-at-death feature added to note

• Premium must be paid, either in the form of additional principal or

increased interest rate to compensate for the cancellation-at-

death feature

OBJECTIVE: Reduction of estate tax if premature death occurs

IDGT Sale - Self Canceling Installment Notes

31


IDGT Sale

Self Canceling Installment Notes – Sample Premiums

Age

SCIN Risk

Premium AFR

Total

Interest

Rate Age 1 Age 2

SCIN Risk

Premium AFR

Total

Interest

Rate

53 0.867% 1.01% 1.877% 53 53 0.068% 1.01% 1.078%

58 1.340% 1.01% 2.350% 58 58 0.156% 1.01% 1.166%

63 2.033% 1.01% 3.043% 63 63 0.338% 1.01% 1.348%

68 3.173% 1.01% 4.183% 68 68 0.756% 1.01% 1.766%

73 5.101% 1.01% 6.111% 73 73 1.705% 1.01% 2.715%

78 8.186% 1.01% 9.196% 78 78 3.612% 1.01% 4.622%

SINGLE LIFE JOINT LIFE

Assumptions

Term of Note 10

AFR 1.01%

Payment Frequency Annually

Type of Note Interest Only with Balloon Payment

32


IDGT Sale

Self Canceling Installment Note - Example

Year Beginning Balance Taxable Income Annual Ending Balance

10.00% Payment

1 10,000,000$ 1,000,000$ (653,520)$ 10,346,480$

2 10,346,480$ 1,034,648$ (653,520)$ 10,727,608$

3 10,727,608$ 1,072,761$ (653,520)$ 11,146,849$

4 11,146,849$ 1,114,685$ (653,520)$ 11,608,014$

5 11,608,014$ 1,160,801$ (653,520)$ 12,115,295$

6 12,115,295$ 1,211,530$ (653,520)$ 12,673,305$

7 12,673,305$ 1,267,330$ (653,520)$ 13,287,115$

8 13,287,115$ 1,328,712$ (653,520)$ 13,962,307$

9 13,962,307$ 1,396,231$ (653,520)$ 14,705,017$

10 14,705,017$ 1,470,502$ (7,653,520)$ 8,521,999$

BENEFIT: $8,521,999 transferred to beneficiaries estate/gift tax-free

*NOTE: Assuming a 78-year-old seller and a $7,000,000 (after valuation adjustments)

interest only, balloon payment feature installment note with a 9.336% annual interest rate

(1.15% + 8.186% mortality risk premium)

33


IDGT SaleWhy an IDGT SCIN Sale Works – Summary

Difference between actual rate of return

and risk-adjusted AFR

Back-end loading

of installment

payments

Payment of trust income

taxes by the grantor

Valuation adjustments

Cancellation-at-death feature

34


‘Tax Burn’ SCINTM Summary

Grantor sells highly-appreciating assets to a grantor trust (such as an

IDGT) in exchange for a Self-Canceling Installment Note (SCIN)

Grantor IDGT

Sale

SCIN

35


Year

Income Tax on

IDGT Income*

Installment

Payment

Received From

IDGT** "Tax Burn"

Cumulative

"Tax Burn" SCIN Balance

Assets

Included in

Grantor's

Estate

1 (400,000)$ 378,000$ (22,000)$ (22,000)$ 6,300,000$ -$

5 (585,640)$ 378,000$ (207,640)$ (552,040)$ 6,300,000$ -$

10 (943,179)$ 378,000$ (565,179)$ (2,594,970)$ 6,300,000$ -$

15 (1,518,999)$ 378,000$ (1,140,999)$ (7,038,993)$ 6,300,000$ -$

-$

* $10,000,000 FM V of assets held in IGDT x 10% return x 40% tax rate (compounded by 10% per year)

** $6,300,000 SCIN principal (discounted) x 6% interest rate (AFR + mortality risk premium)

Asset not included in grantor's estate during note termCumulativ e ef f ect of "tax burn"

eliminates v alue of SCIN coming

back into grantor's estate upon

repay ment

Using a SCIN to Offset ‘Tax Burn’

If grantor dies during term of SCIN, the note and assets sold to the IDGT are out of the

grantor’s estate

If the grantor survives the term of the SCIN, then the “Tax Burn” will have eroded the

grantor’s estate to the point where the repayment of the note will not increase the grantor’s taxable estate

36


Year

Income Tax on

IDGT Income*

Installment

Payment

Received From

IDGT** "Tax Burn"

Cumulative

"Tax Burn" SCIN Balance

Assets

Included in

Grantor's

Estate

1 (400,000)$ 378,000$ (22,000)$ (22,000)$ 6,300,000$ -$

5 (585,640)$ 378,000$ (207,640)$ (552,040)$ 6,300,000$ -$

10 (943,179)$ 378,000$ (565,179)$ (2,594,970)$ 6,300,000$ -$

15 (1,518,999)$ 378,000$ (1,140,999)$ (7,038,993)$ 6,300,000$ -$

-$

* $10,000,000 FM V of assets held in IGDT x 10% return x 40% tax rate (compounded by 10% per year)

** $6,300,000 SCIN principal (discounted) x 6% interest rate (AFR + mortality risk premium)

Initial Burn Point

Full Burn Point

Definitions

Initial Burn Point (a.k.a. “Tax Burn”) — The point at which the income tax liability paid by

the grantor becomes greater than the installment payments received from the trust

Full Burn Point — The point at which any cumulative reinvested “positive transfers” (i.e.,

installment payment received > tax liability) by the grantor and the SCIN are eliminated by the cumulative effect of the “tax burn”

37


Net Taxable Estate

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Year

SCIN Note Outside Assets

Natural "tax burn"

Estate Tax

is Eliminated

in Year One

Example

38


IDGT Sale v. GRAT

IDGT Sale

• Greater flexibility

- Rates vary by term

- Balloon note possible

- Early repayment possible

- Refinance opportunities

• Less inclusion in the event of early death compared to a GRAT

• Greater opportunities to maximize GST exemption

GRAT

• Basically, risk free from an estate-tax perspective

• Allows for a taxable gift of zero whereas the IDGT sale generally requires a “seed” gift

• Specifically addressed in the IRC whereas the IDGT sale is not

39


Parent ChildrenSale

Annuity

payments for

life

Private Annuity

The seller’s age and the current IRC §7520 rate are used for purposes of

determining the amount of the annuity

Provided that the annuity is calculated correctly, the future value of the assets

sold less the future value of the payment stream retained by the seller inures to

the buyer (beneficiaries) free of transfer taxes, thus effectively freezing the

growth of assets at the IRC §7520 rate

Overview

40


*Assumptions

Value of Assets Sold $7,000,000

IRC §7520 Rate 0.60%

Payment Frequency Annually

Timing of Payment End of Period

Age

Private

Annuity

Amount

53 282,366$

58 329,289$

63 391,232$

68 476,132$

73 597,596$

78 773,079$

Private Annuity

Actuarially Computed Annuity Sample

41


Year Beginning Balance Growth Annual Ending Balance

10.00% Payment

1 10,000,000$ 1,000,000$ (773,079)$ 10,226,921$

2 10,226,921$ 1,022,692$ (773,079)$ 10,476,534$

3 10,476,534$ 1,047,653$ (773,079)$ 10,751,108$

4 10,751,108$ 1,075,111$ (773,079)$ 11,053,140$

5 11,053,140$ 1,105,314$ (773,079)$ 11,385,374$

6 11,385,374$ 1,138,537$ (773,079)$ 11,750,833$

7 11,750,833$ 1,175,083$ (773,079)$ 12,152,837$

8 12,152,837$ 1,215,284$ (773,079)$ 12,595,041$

9 12,595,041$ 1,259,504$ (773,079)$ 13,081,466$

10 13,081,466$ 1,308,147$ (773,079)$ 13,616,534$

* Assuming a 78-year-old seller and a $7,000,000 (after valuation

adjustments) sale price

Benefit: $13,616,534 Transferred to Beneficiaries Tax-Free

Private Annuity Example

42


Provides an income stream to the seller for life

Asset not included in seller/grantor’s estate in case of

premature death during the annuity term

Value of assets transferred out of the seller’s estate

greatly exceeds value of payments coming back if

he/she passes away prematurely

Valuation adjustments increase effectiveness of sale

for estate tax purposes

Private Annuity

Advantages

43


Under the Proposed Treasury Regulations, an immediate gain would

be recognized by the seller

The buyer’s payments are not deductible as “interest,” thus causing

more ordinary income to be recognized (double taxation)

Potential upstream transfer if seller lives for a long period of time →

Especially if the seller lives longer than his/her life expectancy

If assets are sold to a trust, possible gift tax exposure could occur if

the trust has inadequate assets to support the payments

Private AnnuityDisadvantages

44


Conclusion


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