Course: Estate Planning
Lesson 12: Valuation and Freeze Techniques to Reduce Estate Tax Liability
I’m not sure how gains are spread out over the course of the note if these are typically structured “as interest only with a balloon payment at the end”. Here’s the language from the lesson:
Instead of an outright sale, an alternative is an installment sale, which has a set contract price that is paid through a series of installment payments over a specified period of time. Typically, they are structured as interest-only payments with a balloon payment at the end of the term.
This method freezes the value of the assets sold, with the unpaid balance reflected as a note in the seller’s estate. It is an especially useful technique if the property being sold is expected to appreciate significantly in future years.
That’s an astute observation.
In a traditional installment note, the seller receives principal monthly. The seller recognizes capital gain under this formula: Gross Profit Percentage x Principal Received.
An interest-only note defers the recognition of realized gain even farther than a traditional installment note. When the principal is paid at the end of the note term, the capital gain is recognized in the year principal is received.
Onward and Upward,