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176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.
162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too
December 6, 2010
The "framework" which President Obama announced today for an agreement to extend the Bush-era tax cuts includes other measures, as well, including a very large increase in the estate tax: from zero today, to 35% on estates over $5 million. (Without the deal, however, the estate tax rate would become 55% on estates over $1 million.)
The framework is not yet law, but I expect that it will be enacted.
Here’s a suggestion, for you to check with your tax and legal advisers: If your estate includes a significant asset which the Internal Revenue Service will likely over-value for estate-tax purposes, consider selling that asset now on a collateralized installment sale ("C453") contract, not to family members but to an independent collateralized installment sale dealer. The contract can place a binding value on the asset now, but the contract can provide for the actual transfer to occur at a later date. You remain as the owner and operator of the asset until that date arrives.
The dealer can later re-sell the asset for a higher price, at which time the resale proceeds will go into a collateral account which will be held and invested by an independent third party such as a bank or financial-services firm whom you approve. The collateral account provides security for the dealer’s installment obligation to you or your estate.
As your tax adviser will likely tell you, the installment contract should not only act as a "freeze" on the value of the asset for estate-tax purposes, but also should be discounted—potentially substantially—for estate-tax purposes. That may result in dramatic savings on the estate tax.
Also, by selling to an independent third party such as a collateralized installment sale dealer, you avoid the issues and arguments you’d otherwise have with the IRS if you were to set up, say, a family limited partnership or other device for passing the asset to family members. Instead of all of that, you pass the installment contract to them.
Of course, the dealer may choose to sell the asset to your family members, but then it’s a deal by a third party, not a deal by you.
Many questions and issues will need to be addressed in the transaction and with your tax and legal advisers, but don’t overlook this potential avenue toward both estate-tax savings and preservation of the viability of your business. Much can be accomplished in a deal with a third party that cannot be accomplished any other way.—Stan Crow
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The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.
The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.