Structuring Installment Sales to Intentionally Defective Trusts: Using Private Annuities and Promissory Notes

Transferring Appreciated Property Through Asset Sales and Installment Payments

A live 90-minute CLE/CPE webinar with interactive Q&A

Wednesday, July 26, 2017
1:00pm-2:30pm EDT, 10:00am-11:30am PDT

Early Registration Discount Deadline, Friday, June 30, 2017

This CLE/CPE webinar will provide estate planning counsel and advisers with a comprehensive, deep and practical guide to structuring asset sales to IDITs. The panel will discuss the use of both promissory notes and private annuities in estate planning, and will identify ideal scenarios for determining which payment vehicle to use. The event will also provide concrete drafting suggestions to avoid tax traps in structuring intra-family wealth transfers to defective trusts.


A valuable but often misunderstood tool for getting appreciated assets out of a gross estate is through sale of the asset to an intentionally defective irrevocable trust (IDIT). Sales take two forms; the first is in exchange for a promissory note and the second is in exchange for a private annuity. Both types of sales functions to freeze the value of the estate. However, the private annuity transaction works especially well when the client is ill and anticipates less time for the freeze of estate property to work. Properly structured, the use of a private annuity can be a highly effective vehicle for transferring appreciating assets out of an estate while minimizing the estate tax impact of transfers.

A private annuity transaction can be drafted in a number of ways to ensure cash flow, establish a business succession, and provide asset protection, but should not be used when the client is in good health because a premium must be added to the sale price or interest rate to avoid gift tax. The premium actually increases the value of the estate if the seller lives close to life expectancy. In structuring a transfer financed by a private annuity, estate planners must make sure the transaction conforms to IRS regulations to avoid gift or estate taxes. If the principal is expected to be depleted before the transferor-annuitant’s life ends, the annuity tables cannot be used. For this purpose, the annuitant will be assumed to die at age 110. This so-called “exhaustion test” must be analyzed carefully in each case prior to implementing the strategy.

Listen as our experienced panel provides a thorough and practical guide to the use of private annuities, and discusses the latest developments in the use of promissory notes in the context of intra-family asset transfers.


  1. Introduction
  2. Structure of standard sale to IDIT transaction using promissory note
  3. IRC Secs. 2036(a)(i) and 2702 and Fidelity-Philadelphia Trust Co.
  4. Sale for a private annuity
    1. 50% probability of survivorship test
    2. The exhaustion test
    3. Another individual as measuring life
    4. Convert a note into an annuity based upon life
  5. Use of a self-canceling installment note (SCIN) – the Davidson case
    1. Terms of SCIN
    2. The Davidson case


The panel will review these and other key issues:

  • How to avoid IRC 2036 issues in structuring a sale of equity in appreciated assets in exchange for a private annuity
  • How do private annuities operate differently from self cancelling installments notes SCINs, and the “50% likelihood of one year survival test” in light of the IRS position stated in CCA 2103-033?
  • What must estate planning counsel be aware of to ensure that the annuity term can be pegged to the actuarial tables?
  • What key drafting language should a private annuity contain to avoid gift tax or unanticipated gain recognition issues?

Learning Objectives

After completing this course, you will be able to:

  • Identify the tax planning advantages of structuring a sale of appreciated assets in exchange for a private annuity
  • Recognize whether a private annuity transaction fits your client’s circumstances
  • Decide how to structure a sale transaction involving a private annuity so that the annuity term can be pegged to the IRS actuarial tables
  • Discern the current IRS position on transactions involving self-cancelling installment notes


Julius H. Giarmarco, Chair of Trusts and Estates Practice Group
Giarmarco Mullins & Horton, Troy, Mich.

Mr. Giarmarco's primary practice areas include estate planning, business succession planning, wealth transfer planning, and life insurance applications. He lectures frequently on a national basis. He published a number of articles on estate planning appearing in professional journals and is also the author of the chapters on succession planning in Advising Closely Held Businesses in Michigan and The Michigan Business Formbook published by the Institute of Continuing Legal Education (ICLE).

Michael D. Mulligan, Co-Chair
Lewis Rice, St. Louis

Mr. Mulligan is a principal originator of the estate planning strategy of sale to defective trust for an installment note, now widely used by estate planners nationally. He has been elected to the Estate Planning Hall of Fame® and has been awarded the Accredited Estate Planner® (Distinguished) designation by the National Association of Estate Planners & Councils. He is currently a member of the Editorial Boards of Estate Planning Magazine and The Journal of Taxation, having written numerous articles for both publications as well as the Journal of the Missouri Bar. He is a frequent lecturer on tax and estate planning subjects, and he has spoken at tax institutes and seminars across the country.

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This program is eligible for 1.5 CPE credits.

  • Field of Study: Taxes.
  • Level of Knowledge: Intermediate.
  • Advance Preparation: None.
  • Teaching Method: Seminar/Lecture.
  • Delivery Method: Group-Internet (via computer).
  • Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of verification codes announced throughout the presentation.
  • Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex trusts and tax schedules; supervisory authority over other attorneys/estate planners. Knowledge and understanding of intentionally defective grantor trust structures and rules. Familiarity with structuring sales transactions to trusts; familiarity with estate planning and trust issues specifically including gain recognition, acceleration and other trust provisions, and asset basis.

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