Cover Story

The Trust Freeze


A wealthy couple wants to leave a collection of income-producing assets, such as investment partnerships that own shares, valued at as much as $150 million, to their children. So they "freeze" the value of the estate at that moment, maybe 20 years before their death, pushing any future appreciation out of the estate and avoiding what could be a $50 million federal estate tax bill.

1. The best approach is an "intentionally defective grantor trust." The couple makes a gift of $10 million—the maximum amount exempt from the gift tax for the next two years—to the trust, which lists the children as beneficiaries.

2. The trust uses that cash as a down payment to buy the partnership from the parents through a note issued to the parents, but the partnership contains a restriction on the trust's use of the assets, thus impairing the partnership's value by, say, 33 percent. That enables the trust to buy the $150 million partnership for just $100 million.

3. The income produced by the investment partnership helps pay off the note. The tax bill on that income is borne by the parents, essentially allowing gifts exempt from the gift tax.

4. When the note is paid off, the trust owns that $150 million worth of assets minus the $90 million note and interest—plus any appreciation in the meantime. The trust has swept up a $150 million income-producing concern without triggering the federal estate tax.

Next: The Option Option

Drucker is a reporter for Bloomberg News.

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