09 Nov How to Prepare for the 2026 Cliff:  Leveraging Installment Sales to Trusts

For many high-net-worth families, a business represents not just wealth but a legacy. Passing it on to the next generation in a tax-efficient manner is a key estate planning goal.  But without smart planning, that legacy may face an unnecessary tax hit. By 2026, estate tax exemptions are scheduled to plummet, creating a sharp increase in estate tax liability for unprepared families. The potential solution?  Act now to protect your assets with an installment sale to an intentionally defective grantor trust (IDGT) –a highly effective strategy to secure your family’s wealth.

If your business generates sufficient cash flow to make the installment payments, this sale-to-trust strategy allows you to transfer the business free of capital gains and gift taxes.  To further sweeten the benefits, the business is removed from your estate, so that any future appreciation in value goes to your heirs free of estate tax.

Why Pair a Trust with an Installment Sale?

With a properly structured installment sale, you transfer your business at fair market value, eliminating gift tax consequences. You set the terms to match your family’s cash flow needs, including flexible payment schedules or interest-only payments with a final balloon payment. Any appreciation in value goes directly to your heirs, free of estate tax.

An IDGT further enhances this strategy by treating the sale as if you were selling the business to yourself for income tax purposes. This means no capital gains taxes, allowing your heirs to receive additional tax-free gifts over time.

Benefits of an IDGT Sale Strategy

While this plan can be complex to set up, a properly structured sale-to-trust plan has substantial benefits:

• Control:  Rather than an outright sale to your children, selling to this type of trust allows you to retain control over the business.

• Income Tax Advantages: You are selling to a grantor trust so there is no sale for income tax purposes.

• Estate Tax Savings: Remove the business’s current value and future growth from your taxable estate.

• Income Tax Efficiency: Pay taxes on trust income yourself, creating indirect tax-free gifts for your heirs.

• Protection Against IRS Recapture: If designed properly, unlike a grantor-retained annuity trust (GRAT), your business should remain outside your estate even if you pass away during the trust term (although the present value of any unpaid installments would be included in your estate).

Risks and Considerations

The trust for this strategy must be structured very carefully by skilled and experienced legal counsel.  For example, the trust must be carefully structured so that it is treated as a grantor trust for income tax purposes but the sale to the trust will be considered a completed transfer for gift and estate tax purposes.

The transaction must also be structured to avoid an IRS challenge that the strategy is a disguised gift. You must ensure that the trust has sufficient assets so an installment sale of the business in exchange for a promissory note would be considered commercially reasonable.

The installment note must also be carefully structured.  For example, it is critical to ensure there is a reasonable rate of interest and other commercially reasonable terms.  The goal is to ensure the note represents a legitimate debt rather than a gift. 

Act Now: Plan Before the 2026 Estate Tax Exemption Drops

The 2026 sunset looms, and time is of the essence. Estate planning strategies like installment sales to trusts take time, often months, to set up effectively. Don’t wait to secure your family’s financial future. Ready to protect your assets from the coming estate tax cliff? Schedule a complimentary 15-minute consultation with us today: Schedule here