Lifetime gifts have the additional advantage of being valued on a per beneficiary basis, rather than based on the grantor’s aggregate ownership. The following numerical examples helps to illustrate: (a) you die owning a family vacation residence with fair market value of $4,000,000, passing to your four children (taxable estate includes $4,000,000) versus (b) you give each of your four children a 25% tenants-in-common interest in the residence (each valued at $850,000, or $3,400,000 total, using a conservative 15% discount).
3. Consider selling assets to a grantor trust for a promissory note, which may be forgiven. One wealth transfer strategy is selling assets to a grantor trust (“intentionally defective grantor trust” or “IDGT”) in exchange for a promissory note. In the usual case, the grantor sells an asset at its fair market value to the trust in exchange for a note, typically with a nine to thirty year term, which note is either self-amortizing or, if the cash flow is not sufficient to amortize, interest only and a balloon payment of principal due at the end of the term. Assets that are either depressed in value or are expected to appreciate substantially should be selected for this purpose. The goal is to remove future asset appreciation, above the mandated interest rate, from the grantor’s estate.
A seed gift to the IDGT is generally recommended (minimum 10% of the purchase price), which uses some lifetime gift and GST tax exemption in order to give the transaction commercial viability. Given the record-high exemption amount, a twist on the typical sale to an IDGT planning is that additional lifetime exemption can be used to forgive a portion or all of the promissory note if it later looks like the exemption amount will decrease.
Given the particularly low current interest rates, sales to grantor trusts are a well-timed strategy even without the forgiveness of indebtedness gift component.
4. Don’t make gifts beyond your comfort zone. In order to “lock in” the increased lifetime exemption, you must use the entire $11,580,000 amount per person. If you were to make a gift of $6,000,000, for example, and the exemption amount subsequently decreases to that amount, you would be deemed to have used all of your exemption. Put differently, use of exemption is, unfortunately, not treated as coming “off the top” of the current amount. Before making gifts of great magnitude, however, it is best to consider carefully your cash flow needs and how the gift could impact you going forward.
We can insert safety values to help ensure that if your estate tax planning goes really well (i.e., you have substantially depleted your estate), you can, say, still draw a salary from your business for your services (while you are still working), stop paying the income taxes associated with gifted assets, and the like. But the best approach from the outset is to take care to refrain from making gifts that might jeopardize your lifestyle, not least in light of the unusual circumstances we currently face. Tax savings is merely a part of a larger discussion to be had around wealth transfer strategies.
You should revisit your estate plan, in general, from time to time, to consider how changes in law, the economy and your personal circumstances may impact your estate plan.
Lauren Galbraith is a partner at Farella Braun + Martel.