Originally appeared in Estate Planning, a Thomson Reuters publication. Copyright 2010 Thomson Reuters/Tax & Accounting.
Intra-family sale transactions have become almost ubiquitous in estate planning for larger estates. In particular, the installment sale to a grantor trust (an intentionally defective grantor trust, or “IDGT”), is used as a wealth freeze and transfer technique. Primarily to give the transfer economic substance, funding the IGDT with some assets prior to consummating the sale (“seed gift”), or having either the beneficiaries of the IDGT, other family members of entities, or others guarantee some portion of the note of IDGT gives back to the seller in the sale transaction, have become integral parts of IDGT/note sale structure. The guarantee arguably supports the economic substance of the entire transaction, “back stops” the valuation of the note, and helps support the determination that the note should be valued at its face.
While seed gifts and guarantees can arise in other types of intra-family transactions, the discussion that follows will use the IDGT/buyer as its paradigm in analyzing the law and practice relating to seed gifts and guarantees.
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