• Large Gifts. Unlike the 2001 tax changes, when the gift tax exemption was often smaller than the estate and GST tax exemptions, here all are equal. So families can immediately take full advantage of the gift tax exemption by making large lifetime gifts before the sunset. As there is a time value to money, planning sooner is better than later when it comes to gifting.
• Dynasty Trusts. Using the larger gift and GST tax exemptions for gifts to dynasty trusts will maximize transfer tax deferral for multiple generations after the sunset. Additional value can be transferred through other techniques, such as installments sales to grantor trusts, which transfer appreciation in the asset sold without requiring the use of additional exemptions, further leveraging the value of gifts to the dynasty trust.
• Grantor Trusts. Grantor trusts shift additional wealth through the grantor’s payment of the trust’s taxes. These tax payments are effectively additional, non-taxed gifts, and they boost the compound growth of trust assets. The value proposition here will be greater in high income or property tax jurisdictions, as payment of the trust’s income taxes produces an even greater wealth shift.
• Basis Management. As irrevocable trust assets generally do not receive a basis step-up at the donor’s passing, it’s critical to manage their basis especially in a sunset climate. Trusts can provide substitution powers to swap low basis assets out of a trust in exchange for high basis assets, so the low basis assets receive a step-up in the donor’s estate.
• Low Interest Rate Planning. “Estate freezes,” like GRATs and installment sales to grantor trusts, generate almost no taxable gifts and only transfer the appreciation in an asset above a set hurdle rate. The initial value of the transferred assets and a predictable annual income stream are returned to the donor, so those assets receive a basis step-up at the donor’s passing. As hurdle rates benefit from current low interest rates that are rising, families may want to move on these techniques now, as appropriate to their situations. Generally, any techniques that leverage the higher exemptions will provide greater advantages.
• State Taxes. Given the new limits on federal deductions for an individual’s state and local taxes ($10,000 in total, if itemizing), planning that reduces state income taxes will become key. Depending on the case, shifting the residency of a trust to a state that does not impose a state income tax may reduce effective tax rates. A trust for an individual’s own benefit that avoids the application of state income taxes without causing a current gift tax (an incomplete gift, non-grantor trust or “ING” trust) also may be a possibility.
Jonathan M. Forster, a shareholder and Chair of the Tax and Business Groupat the international law firm Greenberg Traurig, provides tax, business and estate planning advice to ultra-affluent individuals and their families.