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Graegin Loan
Introduction
A Graegin Loan is the name given to a loan taken out by a decedent’s estate for the purpose of settling the tax and expenses owed by the estate when the estate has insufficient liquidity. The name comes from the US tax court case for the Graegin estate which concluded favorably for the estate, setting a precedent for deductible loan interest in certain circumstances.
Usage And Applications
The headline benefit for a Graegin Loan is that the estate gets to deduct all of the interest payable over the life of the loan upfront as an expense- potentially saving 40% in estate taxes. This will only be allowable under the IRC when certain conditions are met. Central to this is the estate being provably illiquid; as will commonly be the case with family business (CHB) founder estates and real estate portfolios.
Other conditions look to determine the legal substance of the loan agreement (must be bonafide), the prohibition of early prepayment, accelerated interest repayment provisions on loan delinquency or default and the requirement that the loan be tax-deductible at state level.
Examples Of Use
Mr. Client dies with an estate worth 14,060,000 USD at his date of death: 2,000,000 USD above his unified credit which was unused during his lifetime.
The estate has expenses totaling 500,000 USD, bringing the net estate value to 13,560,000 USD.
1,500,000 USD over the unified credit.
The estate owes taxes of 600,000 USD.
The estate only has almost zero cash. The majority of the estate value is held in the family business, founded by Mr. Client 45 years ago. The rest is in a local real estate portfolio of commercial properties which are presently vacant and untenanted.
Mr client’s beneficiaries and wealth managers secure a Graegin loan from a local bank, secured against one of the commercial properties. The loan is for 1,100,000 USD at an interest rate of 5% p.a, for 10 years. This loan face value is sufficient to pay the estate’s expenses and taxes.
| Monthly repayments | $11,667.21 |
| Repayment Total | $1,400,064.80 |
| Total Interest Paid | $300,064.80 |
The estate is able to reduce the 1,500,000 USD subject to estate tax , by the 300,064.80 USD interest expense of the loan.
This has the effect of reducing estate taxes payable by 300,064.80 * 40% = 120,025 USD
That, and Mr Client’s family don’t have to sell the family business or hurry to liquidate their real estate…
Sources & Further Reading
- Estate of Graegin v. Commissioner United States Tax Court September 28, 1988. Docket No. 37230-84.
- 26 IRC § 2053 – Expenses, indebtedness, and taxes