"Ken" <bellcurve[at]comcast.net> wrote:

- quote -

This seems like a very roundabout way for parent to make an
installment sale to child of stock in family corp as a
do-it-yourself estate freeze. The interest rate needs to be
high enough to avoid "gift loan" imputed interest (currently
4.76% per annum, http://www.pmstax.com/afr/index.shtml.) The
amount of the forgiven loan (balance of the installment
note) is included in parent's taxable estate.

If the amount paid for the stock is really fair value, then
what does this accomplish -- other than making parent pay
some capital gains tax in addition to estate tax.

Bob Daniels http://taxprofessor.blogspot.com/

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Ken wrote:

- quote -

I'd say it wouldn't work. The intent to forgive the loan on
Parent's death is probably only one of several obstacles,
but it's the one that jumps out at me.

A loan between parent and child that by its terms is
unlikely to be repaid is not a loan but a gift. If the
amounts involved are large enough that the estate will owe
estate tax, the gift "loan" will affect the estate tax due
or even incur present gift tax.

The stock sale to the child is probably also open to attack,
especially if the sale price is set low for the purpose of
avoiding capital gains on the stock sale. Worst case, maybe
the sale would be imputed at IRS's estimate of market value,
the capital gain taxed to the parent, and the difference
treated as a taxable gift.

--
Chris Green

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Is it legal to shift taxes from estate taxes to capital gains as
follows:

- child borrows money from parent at low interest rate
- loan to be paid interest only for defined time then
balloon for principal
- Loan term to be more than expected life of parent
- Loan specifies forgiveness of principal upon parents death
- Child uses loan to purchase stock in privately help corp.
from parent at low basis (but within reason), avoiding
most capital gains taxes to parent
- At parent's death loan is forgiven and if child sells
stock pays capital gains rate rather than estate paying
estate tax rate on highly appreciated stock price

The size of the estate at anticipated fair market stock
price is large enough to make estate tax deduction
insignificant.

Please don't spend time suggesting possible alternatives,
I'm just interested in the potential legality of this
particular scheme.

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