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Choosing the Best Interest Rate for an Intra-Family Loan Tax advisors often assume that the optimal interest rate on an intra-family loan is the lowest rate that avoids interest imputation and resulting taxation on the loan. Although that approach will avoid imputed income to the lender, it will leave on the table opportunities to further the client’s income tax and estate tax planning goals. What will be covered This presentation will examine not only the minimum interest rates that must be used for intra-family sales and loans, but also discuss the maximum interest rates permitted and examine the application of these minimum and maximum rules to commonly-used income tax planning and estate planning transactions such as how the interest risk premium for a SCIN is computed. The program will also address when cash method taxpayers must report interest income and interest deductions under the OID rules even though the interest has not been paid. The speakers will analyze the income tax and gift tax treatment when high interest rate debt obligations (even those between a grantor and a grantor trust) are renegotiated, and how to restructure the promissory note so that there is no gift. The program will then examine how to “defrost the freeze,” dealing with the potential gift tax and income tax issues raised when the remaining principal on the intra-family debt obligation, be it an installment sale or a GRAT, is in excess of the value of the asset sold to the grantor trust or contributed to the GRAT. This 60 – 90 minute webinar will provide participants with a conceptual understanding and practical application of: - The imputed interest rules of Code §7872 and how they work for both income and gift tax purposes
- When the use of a high interest rate may be advisable
- How interest income is accrued and reported under the OID rules
- The tax consequences of undoing an “underwater” obligation between family members.
Education Objectives Participants will learn to: - Identify opportunities for tax savings when creating intra-family obligations
- Avoid the pitfalls inherent in the OID rules
- Advise clients on how to exit from unproductive planning strategies at the lowest tax cost
Recorded on August 18, 2009, this event is available on CD for purchase.
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