A “REALITY OF SALE” ANALYSIS

OFINSTALLMENT SALES TO

GRANTOR TRUSTS:PROPERLY STRUCTURED, THE

BEST TRANSFER TAX STRATEGY

Sale To IDIT – Three Alternatives

• Promissory Note• Annuity Based Upon Life• Self-Canceling Installment Note [SCIN]

Standard Sale for Promissory Note

• Note Bears Interest at AFR (Frazee)• Fidelity-Philadelphia Trust Co Tests– Interest Not Tied to Income– Other Assets (10%)

Sale for an Annuity Based Upon Life

• 50% Probability of Survivorship for One Year

• The Exhaustion Test• Use Individual Other Than Seller as

Measuring Life

Self-Canceling Installment Note [SCIN]

• Similar to an Annuity Based Upon Life

Sale of Appreciated Property/Is Gain Recognized At Death?

• Madorin Case• Some conclude loss of grantor trust

status either during life or at death causes recognition of gain; note and assets inside IDIT appear simultaneously

• Others conclude gain not recognized at death under Crane

Four Recent Cases Impacting Sale to IDIT Strategy

• Trombetta• Woelbing (two companion cases)• Davidson and CCA201330033

Authorities Supporting Sale to IDIT

• “Reality of Sale” Cases• Cases Involving Sales to Trusts in

Exchange for an Annuity• The Kite case

Trombetta• Decedent transferred mortgaged rental

properties to annuity trust; value of transferred property exceeded value of reserved annuity payments; decedent’s children guaranteed annuity; decedent as Trustee with ½ of vote; Trustees authorized to distribute excess income to decedent

• Implied understandings; no negotiation; decedent on both sides of transaction; decedent benefited from trust payments on mortgage; no legitimate business reasons for transaction

Response to Trombetta

• Independent Trustee• 10% cushion funded with “old and cold”

assets• If interest in closely-held business being sold

to IDIT, seller should dispose of all other interest in the business and give up all contacts as an officer, director or manager

• Arm’s length negotiation with Trustees and beneficiaries represented by separate counsel

Woebling Cases

• IRS asserting inclusion under Section 2036 and gift under Section 2702

• Facts similar to Karmazin case which was settled recognizing validity of sale on terms favorable to estate

Davidson

• Sales to IDITs for SCINs• IRS asserts 50% probability of

survivorship test not apply to a SCIN• Even if IRS position is questionable, why

risk availability of 50% test?