This is an update to a prior article written before the election and a Biden Presidency solidified the possibility for tax reform in 2021 or 2022. Many clients already made large gifts in 2020 to take advantage of the historically high gift and generation-skipping transfer (GST) tax exemptions, concerned that these exemptions could be significantly reduced under a Biden Presidency. Although uncertainty runs rampant, there are still several wealth transfer strategies that can be considered by those wanting to make gifts. For those who have already used a significant portion or all of their exemptions, some of those strategies include:

1. Gifts

Even if an individual or couple previously used their gift and GST tax exemptions, they can still make additional gifts outright or in trust using the following types of gifts:

• 2021 inflation adjustment amount: The gift and GST tax exemption amounts are currently indexed for inflation and, for 2021, those exemptions were increased to $11.7 million from $11.58 million in 2020. Accordingly, each individual has an additional $120,000 of gift and GST tax exemption that can be used this year.
• Annual exclusion gifts: Individuals can make certain gifts up to $15,000 per donee ($30,000 for married couples), which do not count towards their gift and estate tax exemptions.
• Direct payments for tuition and medical expenses: Without depleting the annual exclusion or gift and GST tax exemptions, individuals can pay for educational, dental and medical expenses for family members or friends as long as the expense is paid to the provider directly.

2. Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust in which the grantor makes a gift of property in trust while retaining a right to an annuity from the trust for a specified term of years. GRATs can be used for assets expected to appreciate significantly. Key points:

• The right to the annuity is a retained interest that has a value; this value is subtracted from the full value of the transferred property when determining the taxable amount of the gift.
• If the grantor survives the annuity term, any amount remaining in the trust at the end of the annuity term passes to its beneficiaries without additional gift or estate taxes.
• If the grantor dies during the annuity term, the entire value of the trust generally will be included in the grantor’s taxable estate as if the GRAT had never been created.

One of the primary reasons to use a GRAT is that it can be structured so that the gift tax value is almost zero, meaning that highly appreciating assets can be transferred to the next generation without creating a taxable gift. This can be particularly attractive if clients have already exhausted their gift tax exemption.

3. Sale To Grantor Trust

This strategy takes advantage of the difference between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciation of assets at a reduced gift tax cost. Key points:

• In return for the transfer of property, the trust gives the grantor a note, which carries a market rate of interest and usually requires a balloon payment of principal at the end of the note’s term.
• In most instances, when a trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but two separate entities for transfer tax purposes.
• Because the grantor and trust are the same taxpayer for income tax purposes, neither the sale nor the note payments trigger income tax.
• When the note is repaid, the grantor has transferred the appreciation with no tax liability.

This strategy may be timely for those who have funded a trust using their gift tax exemption, as this technique typically requires some funding of the trust prior to a sale. The ability to lock in current market interest rates, which continue to trend near historical lows, also can significantly benefit the overall transaction.

4. Spousal Lifetime Access Trust

If you are married and concerned that the gifts would reduce cash flow to an unacceptable level, consider creating a Spousal Lifetime Access Trust (“SLAT”) where one spouse uses his/her gift tax exemption to create a trust for the other spouse, while removing the assets from their combined estates. The beneficiary spouse can receive distributions from the SLAT, yet the SLAT is designed to be excluded from the beneficiary spouse’s gross estate and to not be subject to estate tax when the beneficiary spouse dies.

• A SLAT is a type of irrevocable trusts which transfers wealth outside of an estate.
• SLATs take advantage of the current federal exclusion (which expires on December 31, 2025).
• A properly structured SLAT provides the donor limited, indirect access to the trust assets.

The donor’s transfer of assets to the SLAT is considered a taxable gift. If structured properly, the gift permanently removes the assets, as well as future appreciation on the assets, from the donor’s taxable estate. Even though the non-donor spouse is a beneficiary of the SLAT, the trust is excluded from the non-donor’s taxable estate as well. SLATs are typically structured as grantor trusts for income tax purposes.

Reach Out To Us: Choosing and implementing the right estate planning strategies is important this year due to the uncertainty of tax reform, retroactive or otherwise, that could have a substantial impact on your legacy. Our goal is to help you remain flexible and minimize potential gift tax and estate tax exposure.  Call toll free 561-209-1102 or email PWieseneck@Fuoco.com.