Forums Support Library EPT – Estate Planning Tools Installment Sale

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    • Kathleen Reynolds
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      View Sample Report

      Evaluates the effect of purchasing a business interest through an installment sale. It calculates the interest and principal payments required in an installment sale. It also provides a schedule of interest and payment needed to service a buyout loan.

      Paying for a deceased co-owner’s business interest using the installment method has several drawbacks, including the following:

      • The installment method may not produce the amount of cash needed by the client’s family to cover expenses, such as federal and state death taxes and other estate settlement costs.
      • The financial security of the decedent’s family remains dependent on the success of the business.
      • The cost can be very high, even if interest on the unpaid balance is deductible.

      Potential buyers must consider the typically high cost involved with a buy-out. For example, assume a buyer plans to purchase a $1,000,000 business interest. He will pay ten annual principal payments of $100,000 a year, plus 10% interest on the unpaid balance. If the buyer is in a 35% tax bracket, the business needs to earn $1,895,962 to service the loan.
      Installment Sale Screenshot

      Entering Data

      • Purchase Price Enter the purchase price of the property.
      • Number of Payments Enter the total number of installment payment years. Valid inputs are between 1 and 30.
      • Assumed Interest Rate Enter the rate of interest applied to unpaid balance.
      • Buyer’s Tax Bracket Enter the purchaser’s appropriate income tax bracket.
      • Initial Down Payment Enter the down payment or other property (boot) paid to seller in year of sale.
      • Type of Note Select Self-Amortizing, Level Principal, or Interest-Only. Self-amortizing means that the combined principal and interest payments are constant over the term of the note (so the interest component of each payment will decline over the term of the note, while the principal component increases). Level Principal means that the principal of the note is paid in equal annual installments, with annual interest payments based on the principal then outstanding (so the interest payments will decline over the term of the note). Interest Only means that only interest is paid over the term of the note, with a balloon payment of principal at the end of the note.

      Installment Graph Screenshot


      The Summary Tab displays the cost of purchasing a business interest through an installment sale. A schedule of payments needed to buy the business interest is displayed. The schedule consists of the following:

      • The year
      • The annual principal payment
      • The annual interest payment
      • The annual combined principal and interest payment
      • The annual earnings required from the business in order to make the payment.

      The totals are provided for each column at the bottom of the summary report.

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