A sale to an IDGT results in greater value for heirs than if the asset were held outright
Cash flow example:
Scenario 1 Scenario 2: Sell asset to IDGT Hold asset Grantor Cost of taxes
Asset held/sold to trust* $64,285,714 $64,285,714 Coverage 5,000,000 5,000,000 Gift tax on coverage
Assets from initial funding 100,544,702 7,570,535 (37,615,685) 130,589,853 Assets from cascading GRATS 72,558,032 59,045,460 (28,009,827) 41,522,399 Assets held/sold to trust** 533,859,416 533,859,416
Value of assets 2,066,664,527 763,711,690 (3,447,134,919) 4,750,087,756 Estate tax*** (1,136,115,490) (420,041,430) 1,895,924,205 - Net wealth to beneficiaries 930,549,037 343,670,261 (1,551,210,713) 4,750,087,756
Total value to beneficiaries $930,549,037 $3,542,547,303
™ a
Value added by IDGT $2,611,998,266
1. Assets do not receive a step up in basis upon death
* Value shown is prior to assumed valuation discount of 30%, the value of assets for gift tax purposes is assumed to be $45,000,000
** Value shown is prior to assumed valuation discount of 30%, the value of assets for gift tax purposes is assumed to be $373,701,591
*** In scenario 1 an estate tax exemption of $1,000,000 is applied. This is the lesser of the $5,000,000 gift tax exemption applied to scenario 2 and the $1,000,000 applicable estate tax exemption in year 20
Assumptions: The arithmetic return of asset years 1-20=15%;of which ordinary income/short term capital gains = 15%;interest rate paid to grantor = 2.89%;
annual interest payment=$1,300,500; valuation discount = 30%; transfer tax rate (for transfers at the end of year 20) = 55%.
Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Corporate insiders
should consult with securities counsel as to any reporting issues under SEC Section 16 of the Securities Exchange Act of 1934 associated
with receiving shares in-kind.
Note: These materials should not be construed as providing legal, tax, or accounting advice.
On June 7, 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA") which significantly changed estate, gift, and generation-skipping transfer taxes. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Jobs
Creation Act of 2010, which institutes estate, gift, and GST taxes at 35% with a $5MM exemption for 2011 and 2012 (adjusted for inflation), after which rates and exemptions will return to pre-EGTRRA levels.
NOTE: Analysis assumes that at the end of year 5 the $41,522,399 cumulative remainder of cascading GRATs from page 5 is used as seed capital for another note at 9:1 leverage used to purchase $373,701,591 of assets at a 30% discount using today’s long-term AFR of 2.89%
J.P Morgan ;
HOUSE_OVERSIGHT_022357