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

Transferring Appreciated Property Through Asset Sales and Installment Payments

Recording of a 90-minute CLE/CPE webinar with Q&A

Conducted on Wednesday, October 24, 2018

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide estate planning counsel and advisers with a comprehensive and practical guide to structuring asset sales to intentionally defective irrevocable trust (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 removing appreciating assets from an estate is through a sale of the assets to an 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 function to freeze the value of the estate. The private annuity transaction works when the client is ill and anticipates less time for the freeze of estate property to work. Properly structured, the use of a sale to an IDIT can be a highly effective vehicle for transferring appreciating assets out of an estate while minimizing the gift 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. It 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 or beyond 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. Attention must be paid to the so-called “exhaustion test.” If the annuity is payable for the seller’s life, the premium added to the sales price might be viewed as causing depletion of the trust, resulting in a gift upon the sale. For purposes of applying the “exhaustion test,” it must be assumed that the seller will live to the age of 110 years in determining the amount of the gift.

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
    1. The Fidelity-Philadelphia Trust Co. case
    2. The Karmazin and Woebling cases
  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. private annuity vs. self-canceling installment note (SCIN)
    1. Structure of SCIN
    2. The Davidson case and CCA 201330033


The panel will review these and other key issues:

  • What provisions should be included in the trust instrument to avoid income tax on the sale?
  • How to avoid IRC 2036 issues in structuring a sale of appreciating assets for either a promissory note or a private annuity
  • How should a sale and exchange for private annuity be structured to reduce the impact of the exhaustion test?
  • Why private annuities should be preferred over self-cancelling installments notes


Giarmarco, Julius
Julius H. Giarmarco, J.D., LL.M.

Chair of Trusts and Estates Practice Group
Giarmarco Mullins & Horton

Mr. Giarmarco's primary practice areas include estate planning, business succession planning, wealth transfer...  |  Read More

Mulligan, Michael
Michael D. Mulligan

Lewis Rice

Mr. Mulligan is a principal originator of the estate planning strategy of sale to defective trust for an...  |  Read More

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