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Gifts to GRATS versus Sales to Grantor Trusts

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I. Introduction

A. The Idea

    1. The primary approach used by estate planners to reduce estate taxes is for taxpayers to transfer assets to children or grandchildren (or trusts for their benefit) when assets aren’t worth a lot, so that when they become worth a lot the appreciation is transferred without the imposition of estate or gift tax.
    1. The simplest way to accomplish this end for an entrepreneur is to put trusts for the children and/or grandchildren “into” the business from the start. Instead of the parents owing 100% of the business, they can gift cash to trusts for issue and those trusts can invest that cash initially into the business (typically for non-voting interests so that the parents can keep control).  Since cash to initially capitalize a business can be nominal, this approach can allow trusts for issue to own a significant share of the business using the $14,000 annual gift tax exclusion and leaving unified credit intact.  Gift tax risk is also taken out of the picture – the gift is of cash, before the business is a going concern – so there is nothing for IRS to challenge.A similar approach can be undertaken with an existing business that is coming out with a new product or going into a new geographic area.  If new entities are created for these purposes the trusts for issue can invest in a similar fashion.

      The benefits of this approach are illustrated by Example 1, below:


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