Letter to Client Advising on the Tax Impact of Sale of Property by Installments

I would like to bring to your c atomic number 18 the tax ramifications of your expressed meditateation to interchange your dry land to us. But before I can do that, I consider it very essential for you to understand how rudiment practices work. This impart require initial cognition of how the more common AB devotes work. AB organized religion An AB put offers creditor, lawsuit, disjoint and bankruptcy breastplate for the living beginning mate in increment to similar protection for ones heirs when they take charge of their inheritances. The remainder of the number one spouse offs the Living faith be divided into two distinct religious beliefs.Trust A is held in the name of the reenforcement spouse while trust be is in the name of the deceased spouse. some(prenominal) the two trusts ar meant to be for the proceeds of the surviving as long as they are alive, but in the closing curtain the assets will go to the spouses heirs. The surviving spouse, to a pre-agree d and stipulated level, controls Trust B though it belongs to the beneficiaries named in the Trust. All the assets and properties in Trust B pass to the originally stated beneficiaries upon the death of the surving spouse.The properties and assets in Trust B are considered not to be the surving spouses plaza and for that reason they are normally not subject to tax. ABC Trust An ABC Trust has clauses that direct the trustee the revocable Living Trust, upon the occurrence of the first spouses death, to divide the Trust into three distinct and sepa evaluate Trusts as opposed to two in an AB Trust. This has the effect of providing a even great protection from creditors for the living spouse. Just as is the case with AB Trust, the A Trust is a revocable Living Trust for the living spouse.The Band C Trusts are irrevocable and are usually meant to skillful the surviving spouse while they are alive, but the assets in both Trusts lastly transfer to the deceaseds heirs on passing on of t he surving spouse. Currently, $3. 5 one thousand thousand is the tax exempt get per some(prenominal)(prenominal) and $7million for a couple. Trust C holds whatsoever overflow over and above the $7million for couples, and this is inappropriate to AB Trust where the overflows of Income go to Trust A. This extends the creditor, bankruptcy, divorce and lawsuit protection to the surviving spouse in addition to the equal protection offered to heirs, if they wish so.Taxation of induction bargains In certain situations the installing trade of property method allows a change of property without requiring the seller to bang and report gains made on the property until the actual receipt of the payment. The directs that govern induction deals are well hardened down. In addition the gain respite achieved though installment sale treatment, in particular circumstances, and enables the transferor to spread gain over the period of payment of installments depending on the counterwe ight the gross profit on sale carries to the price of the contract.If the seller and the buyer make an agreement to specifically allocate installments, so tax deferrals can be maximized. The rule for eligibility for installment sale treatment, the seller moldiness receive not less than one payment later on the end of form of tax in which the sale occurs . However, there are a number of undesirable transactions, which include among others transactions where the overall sale results into a loss and where transaction involves sale of inventory. Generally speaking, the Taxpayer Relief Act of 1997 (TRA 97) had the cushion of reducing the maximum capital gains rate to twenty per cent.However, some other changes flip been made to the taxation of gains on depreciable factual property. Complexities have often arose in validation of these new provisions to depreciable real estate sold subject. This however is of little bear upon for you because your property is non-depreciable. Cons idering the facts regarding the matter as placed down above, I am blessed to inform you that your effort of reducing the amount of tax that would be due as gain on sale is plausibly to succeed because the sale will be done at market abide by thus no losses shall be realized on the sale, in addition to the fact that the property is not an inventory.Furthermore, the tax will de deferred to the beneficiaries of your estate and thus will likely be spread and share among several beneficiaries and thus the tax upshot will be spread among several shoulders as well. The fact that your estate is held in an ABC Trust is even good news because the level of protection provided to the estate, as well as the beneficiaries if they so wish, against lawsuits and creditors after the grantor passes is significantly high. I therefore strongly recommend that you go ahead with the sale as you stand to gain a lot in from such a sale.