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Sale of an Income Producing Asset To A Grantor Trust

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.

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Sale of an Income Producing Asset To A Grantor Trust

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  1. Sale of an Income Producing Asset To A Grantor Trust Prepared for Mr. & Mrs. James Smith

  2. 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.

  3. A Potential Solution • Sell an income producing asset to a Irrevocable Life Insurance Trust (ILIT) that is “defective” for income tax purposes.

  4. 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

  5. How It Works Receives Interest Payments on Note Trust Pays Insurance Premiums Grantor Sells Assets Gift Seed % Grantor Trust Life Insurance Policy

  6. Current Situation $10,223,094 of Capital Assets and Gifts Held in Estate Value of Capital Assets and Gifts Year 11 $24,667,662 IRS Net Value to Heirs $12,333,831 Estimated Taxes Paid by Grantor $12,333,831

  7. Proposed Plan – Year 11 $10,000,000 of Capital Assets Transferred to Grantor Trust Mr. James Magner & Mrs. Magner Grantor Trust Interest Payments to Grantor = $3,187,755 Cash Gifts to Grantor Trust = $223,094 Promissory Note $6,723,094 Total Insurance Premiums Paid $2,454,034 John Hancock Note Repayment @ Beg. of Year 11 $6,723,094 Value of Capital Assets and Gifts To Heirs $17,910,427 Death Benefit $10,000,000 Total Trust Balance to Heirs $29,939,933 Net Cash Flow from Estate $2,029,505 Estimated Income Taxes Paid by Grantor $2,029,505

  8. Comparison of Benefits to Heirs Net Increase to Heirs from Planning $21,987,115 Net Increase to Heirs from Planning $20,575,950

  9. Initial Setup of Transfer

  10. Comparison of Benefits

  11. Comparison of Benefits

  12. Benefits • Minimal or no gift tax • Heirs receive loan repayment • Minimal risk • No income tax on loan interest payment with “Grantor Trust”.

  13. 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

  14. 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

  15. 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.

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