Note: My readers know that I sometimes make the comment in an article that the topic is too complex/broad and cannot be adequately addressed in a short blog. This is one of those circumstances. Here is some background about Graegin loans.
For a Graegin loan to be an effective tool - In most cases, the estate would have many illiquid assets, for example real estate, art collections or a business. Those assets are seen as not easily ‘marketable’ (without the detriment of a forced sale to the estate.)
The name Graegin loan stems from the case – The Estate of Cecil Graegin v Commissioner in the U.S.Tax Court. The case became the foundation for some estates to borrow funds needed to pay estate taxes. Again, this is the most simple explanation to a highly complex case.
In one tax court memo, it was considered.. (“[t]o avoid a forced sale of its assets, the estate had to borrow money to satisfy its Federal estate tax liability.”)
There are many provisions that must be met and the terms of the loan must be carefully drafted to avoid issues with the IRS. Keep in mind that one important provision is that the loan must be at a market rate.
If you want to read further about provisions/discussion of the case – in the INTERNAL REVENUE SERVICE NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM dated September 15, 2004 (link: irs.gov/pub/irs-wd/0513028.pdf)
In estate and financial planning, the Graegin loan is one tool to be considered when an estate is comprised of assets that consist primarily of ownership interest in a closely held business, and where it is advised that the estate lacks sufficient liquidity to pay estate taxes/administrative expenses and taxes. Note: This estate/financial planning strategy is best utilized only with qualified professional advice.
It is beyond the scope of this article to offer complete direction concerning the use of a Graegin loan in any individual estate situation.
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