4. Disclaimer
A disclaimer is when a gift recipient renounces part or all of a gift transferred to him or her. This money will not be considered a taxable gift. 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 that he For she 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.
• For the favorable tax treatment, the disclaimer must meet 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 the trust—if the sale is for the 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 he or she has had more time to decide whether to make a gift and of how much.
• The grantor can also contribute the promissory note to a trust that qualifies for the lifetime marital deduction and decide when he or she 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 it, there may be some valuation discounts to the note’s value.
Including flexibility in planning is always important, but it can be particularly important when tax laws and family circumstances change. The strategies outlined here have many variations and can often be used in conjunction with one another. They are also just a few of the options clients may want to consider. But it is critical for clients to work with qualified professionals when choosing and implementing the planning that is best for them and their families.
Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago and provides estate and financial planning services to high-net-worth clients.