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Under the gift/sale to grantor trust arrangement, the transferor usually wants to transfer an interest in an asset to family members (e.g., children). The transferor (grantor) will establish an irrevocable trust and intentionally structure the trust with provisions which cause it to be classified as a so-called grantor trust. The grantor trust status causes the grantor to be treated as the owner of the trust principal for income tax purposes (not estate tax purposes). The transferor will gift an interest in an asset (10% or more) to the grantor trust. The gift provides economic substance to the trust. The grantor will then sell the remaining interest in that asset to the grantor trust. The sale will typically call for payback via a balloon note (e.g., interest only for ten years with the note paid off at the end of ten years). If trust principal (portion of the original asset) is used to pay off the note, the grantor would not report any capital gain because he/she is already deemed to own the trust principal for income tax purposes.Generally, the advantages of this type of transfer evolve from the following:
- The asset growth rate is expected to be greater than the interest on the note
- The grantor trust rules and Revenue Ruling 83-13 may allow the grantor to ignore the trust for income tax purposes. Thus, if trust principal (portion of the original asset) is used to pay off the note, the grantor would not report any capital gain because he/she is already deemed to own the trust principal for income tax purposes.
Click the Edit button to set the specifications of the Sale to Grantor Trust:
- The name of the Sale to Grantor Trust
- The year in which the transfer takes place
- The §1274 rate
- To select the asset to use to fund this technique, click the ‘+’ button.
- Verify the amount listed as FMV.
- Discount Percentage Enter the discount percentage.
- Term of Trust Enter the number of years.
- Percent to Gift: Enter the percentage that will be a gift.
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