The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
At the center of some of the most powerful strategies for minimizing estate tax is the humble promissory note. A promissory note is the documentation for a loan. A borrower will sign in recognition of the loan he, she, or it is taking out. That promissory note will then be delivered to the lender and kept in the lender’s records. Below is a sample promissory note between an individual lender and his or her trust.
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Made at: Sioux Falls, South Dakota
Effective Date: March 28, 2024
FOR VALUE RECEIVED, the undersigned, VALUR TRUST COMPANY, as Trustee of the [Insert Trust Name] dated [Insert Trust Name] (the “Borrower”), promises to pay to [Insert Individual Name] (the “Lender”) the principal sum of [Insert Loan Amount] in one installment on March 25, 2033 (the “Maturity Date”), together with interest on the principal amount hereof outstanding from time to time at the “Interest Rate” (as such term is hereinafter defined) as of the Effective Date, subject to the following additional terms and conditions:
1. Manner and Type of Payment. Principal and interest shall be paid to the Lender at such place as the Lender may designate from time to time. Payment of principal, interest and any enforcement costs shall be made in lawful currency of the United States of America or in kind with property of equivalent value, and without set-off, counterclaim or diminution of whatever type. If any payment of principal or interest due on this Promissory Note (this “Note”) is payable on a day which is a Saturday, Sunday or legal holiday in the state whose law governs this Note, then such payment shall be due on the next business day.
2. Interest Rate. The term “Interest Rate” shall mean 4.13% per annum, compounded annually, which is the applicable federal mid-term rate pursuant to Section 1274(d) of the “Code” (as such term in hereinafter defined).
3. Interest Payments. Interest on the outstanding principal amount hereof shall be payable annually on or before each anniversary of the Effective Date, except that the final interest payment shall be payable on the earlier of (a) the Maturity Date, and (b) such earlier date, if any, that the entire principal amount hereof shall be paid in full pursuant to Section 3, below.
4. Optional Prepayment. Notwithstanding any contrary provision of this Note, the Borrower may prepay this Note, in whole or in part, at any time and from time to time, without premium or penalty. Any partial prepayment shall be applied first against any accrued interest and then against the principal balance remaining due.
5. Interest on Overdue Payments. From and after the date upon which any principal hereunder becomes due and payable, if the same is not timely paid, interest shall accrue on said unpaid principal at the Federal interest rate and compounding period applicable from time to time to a “demand loan” made as of such date (as determined by, and as defined in, Section 7872 of the Code), provided that the aggregate interest payable shall not be less than the aggregate interest that would be payable if interest had accrued on said unpaid principal at the interest rate and compounding period set forth in the opening paragraph of this Note.
6. Assignment. The Borrower may not assign, endorse or otherwise transfer any of the Borrower’s rights or obligations under this Note without the prior written consent of the Lender. The Lender may assign, endorse or otherwise transfer the Lender’s rights and obligations under this Note without the consent of the Borrower. Any such transfer of rights and obligations by the Lender (or by any successor or assign of the Lender) shall be recorded in a register to be attached hereto, which shall set forth the name of the registered Lender(s). No such transfer shall be effective until recorded in such register, absent manifest error.
7. Waiver of Protest. The Borrower waives, to the extent permitted by applicable law, presentment, protest, demand for payment and notice of nonpayment or dishonor and agrees that failure of the Lender to exercise any of the Lender’s rights hereunder in any instance shall not constitute a waiver thereof in that or any other instance.
8. Collection Costs. The Borrower shall pay to the Lender on demand the amount of any and all expenses incurred by the Lender in enforcing the Lender’s rights hereunder, including, without limitation, the expense of collecting any amount owed hereunder and of any reasonable attorneys’ fees and expenses incurred in connection therewith.
9. Code. For purposes of this Note, the term “Code” shall refer to the Internal Revenue Code of 1986, as amended.
10. Binding Agreement. This Note shall be binding upon, and inure to the benefit of and be enforceable by, the respective executors, personal representatives, heirs, successors in interest and assigns of the Borrower and the Lender, as applicable.
11. Strict Construction. If any provision hereof shall be held invalid or unenforceable by any court of competent jurisdiction or as a result of future legislative action, such holding or action shall be strictly construed and shall not affect the validity or effect of any other provision hereof.
12. Amendment. This Note may not be amended or modified, nor shall any waiver of any provision hereof be effective, except by an instrument in writing executed by the Borrower and the Lender.
13. Applicable Law. The validity, interpretation and effect of this Note shall be exclusively governed by, and construed in accordance with, the internal laws of South Dakota, excluding the “conflict of laws” rules thereof.
THIS IS A BALLOON NOTE, AND THE ENTIRE OUTSTANDING BALANCE IS DUE ON THE MATURITY DATE, TOGETHER WITH ACCRUED INTEREST AND COLLECTION COSTS (IF ANY).
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the Effective Date.
[Insert Trust Name]
VALUR TRUST COMPANY, Trustee
By: __________________________
Name: _____________________
Title: ______________________
