What are the basics of an installment sale to a grantor trust?

The seller transfers assets to the Trustee of an irrevocable trust. The Trustee will provide payment through a promissory note for the agreed purchase price. The Trustee typically does not make an initial payment. Before the sale, the trust should either have its own assets or be “seeded” with adequate assets to amount to at least 10% of the property’s value. If the trust’s assets are insufficient for the transaction to be regarded as an arm’s-length sale, the Internal Revenue Service (“IRS”) may argue that the sale is actually a contribution to the trust with a retained income interest, resulting in the inclusion of the entire value of the trust assets in the seller’s estate for estate tax purposes. In return for the interests, the Trustee would provide the seller/grantor with a promissory note equivalent to the value of the received interests.