AALU: Estate Freeze Series – Installment Sales to Grantor Trusts
It’s Déjà Vu: Planning (Again) in the Face of Uncertainty – Estate Freeze Series: Installment Sales to Grantor Trusts.
With low interest rates and uncertainty persisting, estate freeze techniques, like installment sales to grantor trusts (ISGTs), continue to play a key role in legacy planning.
The ISGT transfers appreciating assets to the next generation without capital gains taxes and allows the assets to grow in a grantor trust without reduction for income taxes. As a trade-off, the grantor must relinquish control over the assets sold to the trust while retaining liability for the payment of the trust’s income tax obligations. The approach, however, is suited to today’s planning, since the interest rate on the installment note can track currently low applicable federal rates, and the family only moves future appreciation off its balance sheet. The ISGT’s unique features, including grantor trust taxation, substitution powers reserved to the grantor, and the use of formula clauses to adjust the value transferred, create opportunities to optimize the trust’s probability of success.