Intra-Family And Other Business Transfer Techniques - Bargain Sales, Gift or Sale Leaseback, Intentionally Defective Grantor Trust
The bargain sale is the sale of an asset for less than full market value at a "bargain" price, usually made to family members or related parties.
Characteristics of a Bargain Sale:
- Considered part sale and part gift.
- Sales price less sellers basis = taxable gain to seller.
- FMV of property less consideration given = gift value for tax.
- Property is NOT included in the seller's estate at death.
- Taxable gift is added back to seller's taxable estate.
Gift or Sale Leaseback
The gift or sale leaseback is a technique commonly used by older family members where they gift or sell the business or property to a younger family member. In turn, the asset is removed from the parent estate and they then lease the item from the younger family member to continue to run the business.
Properties of a Leaseback option:
- Gift tax is required if asset exceeds the annual exemption amount (gift leaseback).
- Lease payments are tax-deductible to the senior family member.
- Lease payments received are taxable to the junior family member (unearned income).
- Enforceable written agreement between the two parties.
Intentionally Defective Grantor Trust
An intentionally defective grantor trust (IDGT) has long been used to freeze the value of an asset for estate tax purposes while transferring assets out of the estate free of gift tax. An IDGT is a complete transfer to a trust for transfer tax purposes but an incomplete, or "defective," transfer for income tax purposes. Because the trust is irrevocable for estate and gift purposes and the grantor has not retained any powers that would cause estate tax inclusion, the future value of the assets transferred is removed from the grantor's gross estate on the date of the trust's funding.
The trust is irrevocable, but the grantor retains certain other powers and is treated as a grantor trust for income tax purposes. As a result, the grantor, though not a beneficiary, is taxed on all of the trust's income, even though they are not entitled to any trust distributions.Family Limited Partnership or Limited Liability Company
- IDGT receives the gross income generated.
- Income accrues for the trust beneficiaries.
- Assets are removed from the estate of the grantor.
- Grantor retains control.
- Future appreciation of the asset is removed from the estate.
- No gift tax is incurred.
ProfessionalsGrantor Retained UniTrusts
ProfessionalsGrantor Retained Annuity Trusts
ProfessionalsRevocable / Irrevocable Trusts
Retirementby Cathy Pareto, CFP®, AIF® (Contact Author | Biography) A trust is an agreement that describes how assets will be managed and held for the benefit of another person. There are many ...
ProfessionalsValuation of Qualified Interests
SavingsContrary to popular opinion, trust funds are not just for the rich. Middle class citizens can set them up, as well.
ProfessionalsFINRA/NASAA Series 66: Section 3 Corporate and Trust Income Tax. This section discusses corporate income taxes and tax on revocable and irrevocable trusts.
ProfessionalsNASAA Series 65: Section 13 Corporate and Trust Income Tax. In this section corporate income taxes and inocome taxes on revocable and irrevocable trusts.
ProfessionalsTypes, Features And Taxation Of Trusts
RetirementA revocable trust is a legal arrangement whereby a grantor transfers property to a trustee who holds the property in trust for the grantor’s benefit.
An estate planning tool used to freeze certain assets of an individual ...
Guidelines that state a trust is considered to be a grantor trust ...
A trust that can't be modified or terminated without the permission ...
A type of legally binding trust agreement in which the contributed ...
A gift given during the life of the grantor. Following a gift ...
A specific type of trust that allows its creator to remove a ...
Trust law gives the grantor specific rights over the release of assets and therefore it is not possible to change the stipulations ... Read Answer >>
Find out more about irrevocable trusts, revocable trusts and the main differences between them. Read Answer >>
Investigate the choice between a revocable trust and a traditional will and how their unique advantages can match asset management ... Read Answer >>
Learn how revocable living trusts are established, how the trust maker transfers funds into the trust, and the advantages ... Read Answer >>
Understand what types of assets can be included in a revocable trust, and why some asset types are excluded from this estate ... Read Answer >>
Learn how a revocable trust becomes a split-interest trust upon the death of the of the grantor when there are both charitable ... Read Answer >>