Installment sales are an excellent way to use leverage to move appreciating assets to junior generations, especially skip generations. As long as the yield (measured as a percentage of the sold asset’s fair market value) on the underlying assets sold exceeds the interest rate charged as determined by the Internal Revenue Service tables, the excess income constitutes a transfer-tax-free shift of wealth to junior generations. When a defective trust is used, the income tax otherwise payable by those junior generations becomes a liability of the senior generation, creating a favorable tax burn. In some situations, using a taxable installment sale may permit the junior generations’ trusts to reset basis depreciation purposes; however, care must be taken to avoid certain related-party rules in the Internal Revenue Code.

Peter will discuss the basics of installment sales in estate planning:

• What is an installment sale
• What terms, including payment timing and rates of interest, to use in intrafamily installment sales
• Proper seed gifting
• Using sales to defective trusts to leverage intergenerational wealth transfer
• An introduction to taxable installment sales (installment sales to non-grantor trusts and third parties)