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Financial projection
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Summary
This document from J.P. Morgan outlines the projected 20-year economic flows of an Intentionally Defective Grantor Trust (IDGT). It details the initial funding, assumptions about returns and tax rates, and a significant additional funding event in year 5 from cascading GRATs. The main table projects the annual return, payments, and pre-discount trust value, culminating in a net trust amount of approximately $4.75 billion after 20 years.
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Full Extracted Text
Complete text extracted from the document (2,738 characters)
Economic flows of IDGT*
Example - Initial Funding
Total assets transferred to trust $69,285,714
Valuation discount 30%
Valuation of assets for gift tax purposes $50,000,000
Seed capital/coverage $5,000,000
Trust term 20 years
Lifetime gift tax exemption applied $5,000,000
Gift tax paid $0
Applicable interest rate (AFR) 2.89%
Annual interest payment on note $1,300,500
Note face value (year 20 balloon payment) $45,000,000
Total assets transferred to trust $69,285,714
Valuation discount 30%
Valuation of assets for gift tax purposes $50,000,000
Seed capital/coverage $5,000,000
Trust term 20 years
Lifetime gift tax exemption applied $5,000,000
Gift tax paid $0
Applicable interest rate (AFR) 2.89%
Annual interest payment on note $1,300,500
Note face value (year 20 balloon payment) $45,000,000
Additional funding in year 5 from cascading GRATS
Assumed assets in trust at the end of year 5 $91,799,393
Additional assets from GRATS $41,522,399
Additional note (9:1 leverage) $373,701,591
Initial note outstanding face value $45,000,000
Total outstanding notes $418,701,591
Remaining note term 15 years
Lifetime gift tax exemption applied $0
Gift tax paid $0
Applicable AFR 2.89%
Annual interest payment on notes $12,100,476
Assumed assets in trust at the end of year 5 $91,799,393
Additional assets from GRATS $41,522,399
Additional note (9:1 leverage) $373,701,591
Initial note outstanding face value $45,000,000
Total outstanding notes $418,701,591
Remaining note term 15 years
Lifetime gift tax exemption applied $0
Gift tax paid $0
Applicable AFR 2.89%
Annual interest payment on notes $12,100,476
Assumptions
- The arithmetic return of assets = 15%; of which ordinary income/short term capital gains = 15%
- Income tax rate used for majority of analysis = 48.4% (Federal = 39.6%, New York City = 8.33%, Medicare = 3.8%)
- Capital gains tax rate used for majority of analysis = 28.8% (Federal = 20%, New York City = 8.33%, Medicare = 3.8%)
- Income and capital gains tax rates adjusted in early years to reflect current law
- Assumes note payments are satisfied using yield first, then seed capital, and finally other assets. If a valuation discount is specified, a pre-disount value is used
- The arithmetic return of assets = 15%; of which ordinary income/short term capital gains = 15%
- Income tax rate used for majority of analysis = 48.4% (Federal = 39.6%, New York City = 8.33%, Medicare = 3.8%)
- Capital gains tax rate used for majority of analysis = 28.8% (Federal = 20%, New York City = 8.33%, Medicare = 3.8%)
- Income and capital gains tax rates adjusted in early years to reflect current law
- Assumes note payments are satisfied using yield first, then seed capital, and finally other assets. If a valuation discount is specified, a pre-disount value is used
CONFIDENTIAL
Year Return (asset and seed capital) Interest and principal payments on note Trust Value (pre-discount)
0 69,285,714
1 10,392,857 1,300,500 78,378,071
2 11,756,711 1,300,500 88,834,282
3 13,325,142 1,300,500 100,858,924
4 15,128,839 1,300,500 114,687,263
5 17,203,089 1,300,500 705,971,667*
6 105,895,750 12,100,476 799,766,941
7 119,965,041 12,100,476 907,631,507
8 136,144,726 12,100,476 1,031,675,757
9 154,751,364 12,100,476 1,174,326,644
10 176,148,997 12,100,476 1,338,375,165
11 200,756,275 12,100,476 1,527,030,964
12 229,054,645 12,100,476 1,743,985,132
13 261,597,770 12,100,476 1,993,482,426
14 299,022,364 12,100,476 2,280,404,314
15 342,060,647 12,100,476 2,610,364,485
16 391,554,673 12,100,476 2,989,818,682
17 448,472,802 12,100,476 3,426,191,008
18 513,928,651 12,100,476 3,928,019,183
19 589,202,878 12,100,476 4,505,121,585
20 675,768,238 430,802,067 4,750,087,756
Return to grantor (nominal) 606,711,231
Net trust amount 4,750,087,756
0 69,285,714
1 10,392,857 1,300,500 78,378,071
2 11,756,711 1,300,500 88,834,282
3 13,325,142 1,300,500 100,858,924
4 15,128,839 1,300,500 114,687,263
5 17,203,089 1,300,500 705,971,667*
6 105,895,750 12,100,476 799,766,941
7 119,965,041 12,100,476 907,631,507
8 136,144,726 12,100,476 1,031,675,757
9 154,751,364 12,100,476 1,174,326,644
10 176,148,997 12,100,476 1,338,375,165
11 200,756,275 12,100,476 1,527,030,964
12 229,054,645 12,100,476 1,743,985,132
13 261,597,770 12,100,476 1,993,482,426
14 299,022,364 12,100,476 2,280,404,314
15 342,060,647 12,100,476 2,610,364,485
16 391,554,673 12,100,476 2,989,818,682
17 448,472,802 12,100,476 3,426,191,008
18 513,928,651 12,100,476 3,928,019,183
19 589,202,878 12,100,476 4,505,121,585
20 675,768,238 430,802,067 4,750,087,756
Return to grantor (nominal) 606,711,231
Net trust amount 4,750,087,756
J.P.Morgan
* Analysis assumes that at the end of year 5 the $41,522,399 cumulative remainder of cascading GRATs from the previous page is used as seed capital for another note at 9:1 leverage used to purchase $373,701,591 of assets at a 30% discount using today's long-term AFR of 2.89%
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