Installment Sales to Grantor Trusts: Prop-Ups for Down Times

摘要

The installment sale to a grantor trust can be a powerful wealth transfer planning tool when the assets sold to the trust actually appreciate in value and the cash flows generated by the trust facilitate the trust's timely repayment of the promissory note. In a down economy, however, the trust's assets often depreciate and leave the trust partially or completely underwater without a reliable cash flow to repay the grantor-lender. The trust may default on its obligations under the note. The grantor-lender's failure to timely and properly address these situations and analyze the myriad related income and transfer tax questions may produce results worse than just an unsuccessful attempt to transfer wealth. Such failure may also cause the grantor-lender to miss an ideal opportunity to transfer wealth in a tax advantaged manner.