Sale of an Income

Producing Asset To A
Grantor Trust

Prepared for
Mr. & Mrs. James Smith
 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.
 A Potential Solution

• Sell an income producing asset to a Irrevocable Life

Insurance Trust (ILIT) that is “defective” for income tax
purposes.
 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

 How It Works

Receives Interest
Payments on Note

Trust Pays
Grantor Insurance
Sells Assets Premiums

Gift Seed %
Grantor
Trust
Life Insurance
Policy
Current Situation

$10,223,094
$10,223,094
of Capital Assets
and Gifts Held in Estate

Value of Capital Assets and Gifts

Year 11
$24,667,662
$24,667,662

IRS
Estimated Taxes Net Value to Heirs
Paid by Grantor $12,333,831
$12,333,831
Proposed Plan – Year 11
$10,000,000
of Capital Assets Transferred to Grantor Trust
Mr. James Interest Payments to Grantor = $3,187,755
Magner & Mrs. Grantor Trust
Magner Cash Gifts to Grantor Trust = $223,094

Promissory Note
$6,723,094

Total Insurance
Premiums Paid
Note Repayment @ Beg. $2,454,034
of Year 11 $6,723,094 John Hancock
Value of
Capital Assets and Gifts
Death Benefit To Heirs
$10,000,000 $17,910,427

Total Trust Balance

Net Cash Flow from Estate
$2,029,505 to Heirs
$29,939,933
Estimated Income Taxes
Paid by Grantor
$2,029,505
 Comparison of Benefits to Heirs
Net Increase to Heirs Net Increase to Heirs
from Planning from Planning
50,000
$21,987,115 $20,575,950
Thousands

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
Pay Off Year Focus Year

Without Planning With Planning

 Initial Setup of Transfer

Assets Sold to Grantor Trust

Fair Market Value $10,000,000
Less: Initial Asset Gift to Grantor Trust as Seed $1,035,875
Fair Market Value After Initial Gift $8,964,125
Actual Value of Assets Sold To Grantor Trust (30.0%) $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
 Comparison of Benefits

Sale Assets Retain Assets

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

 Comparison of Benefits

Sale Assets Retain Assets

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

 Benefits

• Minimal or no gift tax

• Heirs receive loan repayment

• Minimal risk

• No income tax on loan interest payment with “Grantor

Trust”.
 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 ILIT’s 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
 Considerations

• Interest on loan is non-deductible.

• Client pays tax on ILIT’s 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
 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.