4. Disclaimer
A disclaimer is when a gift recipient renounces part or all of a gift transferred to that recipient. When a gift is made to a trust, the trust instrument can specify how the assets pass in the event of a disclaimer. If a grantor makes a gift to a trust but is concerned that the gift is unnecessary or the grantor may need the assets back, then the trust can provide that the assets revert to the grantor in the event of a disclaimer.
• Disclaimers must generally be made within nine months of the transfer, so there will be a nine-month window to see if the transfer tax exemptions are reduced and to determine the grantor’s need for the assets.
• In order for there to be favorable tax treatment of the disclaimer, the disclaimer must be a “qualified disclaimer” by meeting several requirements under federal and state law.
5. Planning With Promissory Notes
Planning with promissory notes may be another way to include flexibility in the timing, implementation, and amount of planning. Often with this strategy, an asset is sold by the grantor to a grantor trust in exchange for a promissory note. There is no income tax consequence upon sale because the sale is to a grantor trust and, if the sale is for full market value, there is no gift. Instead, the grantor can decide when, and if, to make a gift with the promissory note. For example:
• The grantor can forgive all, or part, of the promissory note closer to the end of the year when the grantor has had more time to decide whether to make a gift and of how much.
• The grantor can contribute the promissory note to a trust that qualifies for the lifetime marital deduction and decide when the grantor files a gift tax return whether to use the marital deduction or the gift tax exemption for the gift to the trust.
• The grantor can continue to hold the promissory note and to receive interest and principal payments over the term of the note. If the grantor dies holding the note or later makes a gift of the note, there may be some valuation discounts that apply to the value of the note depending on the circumstances.
Including flexibility in planning is always important, but it can be particularly important when tax laws and family circumstances may change. The strategies outlined above have many variations and can often be used in conjunction with each other. They are also just a few of the options that you may want to consider. It is critical to work with qualified professionals when choosing and implementing the planning that is best for you and your family.
Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with 17 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.