A Review of Income Tax Issues Associated With Intra-Family Loans & Installment Sales – Series I of IV

For years, wealthy families and their advisors have utilized intra-family loans and installment sale transactions as part of an overall estate planning strategy to shift wealth tax efficiently between generations. In fact, installment sales of appreciating assets between grantors and grantor trusts in exchange for promissory notes have become one of the more common estate freeze techniques over the last several decades. The number of these transactions has exploded largely as a result of the low interest rate environment we’ve experienced since the early 2000’s. Times are changing and interest rates are expected to be higher over the foreseeable future. Accordingly, we think it’s important for clients and estate planning practitioners to review and reacquaint themselves with many of the income tax rules associated with these transactions to make sure intra-family debt doesn’t produce unintended income tax consequences that could derail the transfer tax benefits sought to be achieved.

This paper is the first of a four-part series that will provide a review of IRC Section 7872, Section 483, and the so-called original issue discount (“OID”) rules, primarily under IRC Sections 1272-1274. Additionally, this part focuses on loans and debt transactions between trusts and their beneficiaries, including the possibility of below market or interest free loans from trusts to, or for the benefit of, their beneficiaries.

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