November 26, 2020

Volume X, Number 331


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November 24, 2020

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Sales to Grantor Trusts

In a Sale to a Grantor Trust, a client sells property to a grantor trust (known as an Intentionally Defective Grantor Trust, or “IDGT”) for the benefit of the grantor’s children and grandchildren in exchange for an installment note bearing interest at the Applicable Federal Rate (“AFR”), as published each month by the IRS, in order to avoid adverse gift tax consequences. 

The AFR is broken into three tiers depending on the term of the loan: the short-term rate applies to loans of up to three (3) years, the mid-term rate applies to loans with a term between three (3) and nine (9) years, and the long-term rate applies to loans with repayment terms of greater than nine (9) years. For October 2020, the short-, mid-, and long-term AFRs are 0.14%, 0.38%, and 1.12%, respectively. 

An IDGT is a trust which is recognized for federal estate tax purposes, but ignored for income tax purposes. This means that property transferred to an IDGT will not be included in the grantor’s taxable estate, but the grantor will be taxed on all trust income. This is, in fact, advantageous for many reasons. In the Sale to Grantor Trust arrangement, when the grantor sells assets to the IDGT in exchange for a promissory note, the value of the assets are frozen at the amount of the note. Since the trust is not distinct from the grantor for income tax purposes, the sale does not result in any recognition of capital gain and there are no income tax consequences associated with the grantor’s payment of the taxes on behalf of the trust. 

At the end of the IDGT term, to the extent that the total return on the trust assets exceeds the currently low interest rate on the note, you can shift growth and income to your beneficiaries without incurring any transfer tax liability. While any asset can be sold to an IDGT, this strategy is particularly effective with property having a low current valuation, potential for appreciation, and/or is valued at a discount due to lack of marketability or control.  

Note that our SLATs and Dynasty Trusts are often also IDGTs, and therefore we can combine several gifting strategies together.

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About this Author

Michael Clear Estate and Trust attorney Greenwich Wiggin and Dana

As a Partner in the firm's Private Client Services Department, Michael regularly counsels clients on the far-reaching financial implications of estate planning, estate and trust administration, probate litigation, and business succession planning. Yet he is also a trained counselor with insight into the family dynamics these matters can effect. Known for his empathy and good humor, he helps clients take prudent action in the face of indecision, hopefully resolving contested issues before litigation.

Michael's estate planning practice includes assisting individuals and families in...

Veronica Bauer Estate Planning Attorney

Veronica R.S. Bauer is a Partner in the firm's Private Client Services Department in Palm Beach, Florida. Veronica focuses her practice on estate planning, estate and trust administration and charitable planning and administration.

Her practice includes assisting individuals and families with tax-efficient and practical estate, gift and income tax planning. She also assists fiduciaries and beneficiaries through estate settlement and trust administration matters

Robert Benjamin Estate Planning Attorney Wiggin and Dana

Bob has over three decades of experience as an estate planning and probate lawyer and previously served as Chair of Wiggin and Dana's Executive Committee (2009–2015). He is a Partner in the Private Client Services Department and counsels foreign and domestic clients in matters relating to estate planning, probate, and the taxation and administration of trusts and estates. He often works with clients who have complex estate planning needs, such as family business owners and artists. He is also a resource to lawyers at other firms in situations where difficult family dynamics or complex...

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Karen Clute Tax attorney New Haven Wiggin and Dana

Karen is committed to helping clients navigate ever-changing tax and fiduciary rules. As a member of the firm's Private Client Services Department, Labor and Employment Department, and Philanthropy Practice Group, Karen has a wide-ranging practice grounded in a deep understanding of the intersections of personal-, community-, and employment-related tax, fiduciary, and financial concerns.

She advises individual clients about a broad range of estate planning issues, with an emphasis on estate and income tax planning. She works with executors and trustees on fiduciary matters and...

Daniel Daniels Estate planning lawyer Wiggin Dana

For three decades, Dan has dedicated himself to counseling families in preserving wealth from generation to generation. His clients include affluent individuals, family offices, business owners, C-suite executives and private equity and hedge fund founders. He assists them in estate and business planning, trust and estate administration, probate litigation, and more.

Dan has been named by Worth magazine as one of the top 100 trust lawyers in the United States. He is one of six trust and estate lawyers in Connecticut ranked in Band 1 by the international ranking service ...