After spending your life building a
successful company and a level of
wealth, the last thing you want to happen upon your death is for the government to take all of your money.
“There is a way to limit or eliminate
altogether estate and gift taxes and
allow for estate tax-free future asset
growth,” says Chris T. Christensen, president and CEO of The Advanced
Strategies Group, Inc. in Southfield.
Smart Business talked to Christensen
about a strategy that enables business
owners to shrink their estate without
losing value for their heirs.
How can clients allow for estate tax-free
future asset growth?
This is accomplished by using an
installment sale to a grantor trust that
allows the transfer of assets to heirs
without gift, estate or capital gain taxes
and also allows the appreciation of
assets to accrue to the heirs, not to the
owner of the estate. This planning strategy works by creating an irrevocable
trust for the benefit of the next generations of family members. The trust is
designed so that the grantor is taxed on
the trust’s income but the trust’s assets
are not taxed in the grantor’s estate.
The trust can also be designed as a generation-skipping trust so that any assets
remaining inside the trust at a child’s
death pass estate tax-free to the grandchildren and maybe even the great-grandchildren. This arrangement also
protects the trust’s beneficiaries from
lawsuits, including divorces.
How can a client start an installment sale
plan?
The grantor makes a gift to the trust as
‘seed money,’ which should be at least
11.11 percent of the value of the assets to
be sold to the trust. This gift will consume part or all of the grantor’s $1 million ($2
million if married) lifetime gift-tax exemption. This gift can be made using cash or
the same property to be sold to the trust.
The grantor subsequently sells assets to
the trust, which will return more profit than
the cost of the interest on the note given in
payment. Usually, there is no down payment, interest is payable annually, and there
is a balloon payment that would be due at
the end of a set term lasting nine years or
longer. The assets sold to the trust — which
must generate income for interest payments
— may qualify for valuation discounts for
lack of marketability and control. For example, nonvoting interests in an LLC or a
Subchapter S Corporation are good assets
to sell to a grantor trust. The interest rate on
the note is fixed for the entire term at the
lowest rate allowed by the IRS.
Is this technique of an installment sale the
most efficient method of transferring
wealth?
It is one of the most efficient methods for
transferring large amounts of wealth because the tax benefits are very significant.
The grantor does not recognize a gain on the
sale because the grantor and the trust are
treated as one in the same person for
income tax purposes. The grantor is not separately taxed on the interest payments
received. Instead, the grantor is taxed on all
of the trust’s income. Moreover, if the trust
makes interest payments using some of the
assets purchased instead of cash, the
grantor recognizes no income and is instead
taxed on all of the income from the property of the trust.
In fact, the grantor is making tax-free
gifts to the beneficiaries by paying the
trust’s income tax. If the total return on
the assets sold to the trust exceeds the
interest rate on the note, the excess is
transferred tax-free to the beneficiaries.
The transfer tax benefits are enhanced
by the grantor’s payment of the trust’s
income taxes. Basically, the trust grows
income tax-free. These excess trust
assets can be reinvested however the
grantor decides, including acquiring life
insurance on the grantor and/or their
spouse’s life. If the trust is designed as a
generation-skipping trust, the assets
inside the trust can escape estate taxes
in the estate of the children, grandchildren and perhaps great-grandchildren.
Any final thoughts?
Selling assets on the installment
method to a grantor trust allows for the
income tax-free transfer of appreciating
property outside the estate and enables
making tax-free gifts in the form of
income tax payments on trust income.
These tax advantages — plus the asset
protection afforded to beneficiaries—
make the sale to a grantor trust an outstanding wealth transfer technique.
CHRIS T. CHRISTENSEN is president and CEO of The
Advanced Strategies Group, Inc. Reach him at (248) 359-2480 or
[email protected].
