Installment sale or intra-family loan (Incl. IDGTs, SLATs)

You can model hypothetical installment sales & intrafamily loans within the Estate Waterfall. This guide outlines how to get started modeling this wealth transfer strategy.

Step-by-step guide

1. Getting started

   1. In a hypothetical waterfall, click on the Transfers button and click Add a new hypothetical transfer

   2. You will be prompted to select which strategy you want to model. Click on either Installment sale or Intra-family loan

      1. From a modeling standpoint, there is no difference in the inputs or outputs, but we have provided these as separate entry points as these are two different kind of transactions involving either a note or receivable.

   Note, if modeling sale or loan, it is very common to model a seed gift to the recipient entity. In order to do so, model a Gift/transfer to the same recipient entity as the sale / loan transaction.

2. Enter Sale/loan details

   1. On the left side panel, enter the following information:

      1. Seller: select an existing entity or individual with assets

      2. Recipient: select an existing entity or individual or you can create a new draft entity

      3. Start date: this defaults to the current date, but can be in the future as well

      4. Term years: enter a min of 1 and max of 30 years.

      5. AFR: to reference the current AFR, there is a link provided to the published rates on the IRS website

   2. Specify assumptions if the 1st grantor dies prior to term end of the sale/loan:

      1. Sale is repaid at time of death: Upon death, assets are deducted from the receiving entity by the amount of the remaining note balance.

      2. Sale is canceled: Assumes the remaining note balance is includable in the grantor’s taxable estate, and no additional assets are deducted from the receiving entity. The remaining balance reduces the grantor’s remaining lifetime exemption and taxes are assessed accordingly.

   Please note that the cancel option does not represent a Self-Cancelling Installment Note (SCIN). Luminary does not currently calculate SCIN note payments at this time.

3. Assets

   1. Enter the funding amount of the sale/loan.

      1. This can be entered either as a specific $ or % amount, or you can select specific asset categories to fund the sale/loan with.

   2. Adjust the ‘Assume growth rate applied to recipient toggle’ as necessary

      1. If enabled, custom growth rates applied to the recipient will supersede those applied to the source for modeling growth.

      2. For example, if the recipient entity has a growth rate of 10% and the source entity has a growth rate of 3%, we will assume the assets in the sale/loan will grow at a rate of 10%.

4. Payment

   1. Enter the payment structure of the sale or loan:

      1. Interest only with balloon: assumes interest only payments until the final year of the sale/loan in which the note principal will be due

      2. Fully amortizing: interest and principal payments will be paid back over the duration of the sale/loam term

      3. Single lump sum payment at term end: no payments will be made until the final year in which principal + compounded interest payments will be due

5. Growth rate and death order

   1. In the top right corner, you will see the assumed growth profile and death years used for the simulation. Clicking on the button allows you to modify this.

After you are done with the sale/loan set up, click Create installment sale (or Create intra-family loan). You will then be redirected to the diagram view of the estate waterfall with the hypothetical strategy displayed.

FAQs