double dagger]) Value is not "frozen" once the principal is paid from the GRAT or the note is paid from the IDGT
246) The interest rate should equal the section 7872 applicable federal rate, which is lower than the section 7520 rate that applies to GRATs, making an IDGT
potentially more profitable than a GRAT.
After seeding the IDGT
, the client then sells assets to the irrevocable trust in exchange for the promissory note.
Since a sale to an IDGT
is a disregarded event, the trust takes a carryover basis in the assets transferred.
Question--What are the implications if an IDGT
requires the trust to pay back the grantor for any income tax liability generated by the trust?
Let's say for example you transfer a building worth $5 million, having a cash flow and income of $400,000 per year, to a partnership and gift a 60% interest in the partnership to an IDGT
for the benefit of your children.
Sklarz then explained the planning benefits of the IDGT
transaction: "The important aspect is that this is considered a completed gift for transfer tax purposes, but not a completed gift for income tax purposes.
With regard to servicing the interest payments on the promissory note, the sale to the IDGT
works especially well when rental real estate is contributed to the limited partnership because the distributions of the rental income to the grantor trust can be used to service its interest payments.
The taxpayer and the IDGTs
entered into transactions commonly referred to as sales to an IDGT
With a GRAT or sale to an IDGT
, the client can give away a lot more in value than is otherwise allowed under the annual and lifetime gift tax exclusions" says Daroff.
Letter Ruling 200842007 (18) provides an alternative to creating an IDGT
by including a nonfiduciary power of substitution in the trust instrument that avoids the estate tax consequences associated with such power.
When substantiated with an appraisal, valuation discounts for the sale of minority interests in closely-held entities provide additional leverage--even as the grantor retains control of the entity outside of the IDGT