Sale & Leaseback

August 26, 2020

Michael Syer, CFP®

KnowledgeSHARE

With real estate properties continuing to increase in value and interest rates at historical lows, real estate assets can often be a significant piece of a taxable estate.  A sale-leaseback can be a simple but highly effective estate planning strategy for a family to remove appreciating real estate from the estate while continuing to use the property.  It can be a particularly effective strategy if the property is expected to appreciate in value, you would like to remove the asset from your taxable estate, you would like to continue to use the home, and you would like to pass the property down to your children or other family members.

Sale & Leaseback Strategy

The transaction will require two parties, with the grantor (owner) selling the property to the other party (ie. family member) and immediately leasing the property back.  The property is often sold to a trust which is “defective” for income tax purposes, with the income taxed to the grantor.  Although “defective” for income tax purposes, it can be very effective for estate and Generation Skipping Transfer (GST) tax planning.  The transaction would be structured as follows:

  • The grantor creates a trust for the benefit of his/her descendent(s)
  • The grantor gifts a portion of the home to the trust (typically 10%)-this will use up some of the grantor’s lifetime exemption amount ($11.58M/person in 2020)
  • The grantor sells the property to the trust for fair market value (determined by a qualified appraisal) in return for a promissory note
    • The note is typically between 9 years and 25 years and the rate is set at the Applicable Federal Rate (AFR) which is the lowest rate allowed per the IRS-the August 2020 rate is 1.12%
  • The grantor leases the property back from the trust at fair market rent. The rent payments are then used by the trust to pay the promissory note payments.
    • The lease payments will reduce the grantors taxable estate while also serving as additional tax-free gifts to the beneficiaries

Gift & Leaseback

Alternatively, a grantor may decide to gift the property and then leaseback to continue living in the home.  This could be a good strategy if the grantor still has a significant amount of lifetime exemption remaining or there is a strong possibility that the current exemption amounts will be rolled back in 2025 or sooner.

Summary

The current economic and interest rate environment has provided many with an opportunity to pursue highly effective estate planning and wealth transfer strategies. One of these strategies is the sale or gift and leaseback of real estate.  For families with significant real estate asset(s), this could be a tremendous opportunity to transfer a property to future generations while minimizing future estate taxes and taking advantage of the historically low interest rates.

Want to Learn More?

Feel free to contact our Wealth Strategies group if you have questions on this estate planning topics or would like help connecting to an estate attorney.

Robert Katz, CFP® – Partner, Director of Wealth Strategies – 617.986.5145 

Michael Syer, CFP® Wealth Strategies Advisor – 617.986.5157

Nicole DellaPasqua – Client Associate – 617.986.5159

 

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