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Family Gift Planning — Perhaps the Best Time Is Now

With an upcoming election, economic uncertainty, and a dining room that has become both a school and a home office, family gift planning may be far from the top of your to-do list. The current environment, however, creates an opportunity for high-net-worth individuals to save on wealth transfer taxes, and this window of opportunity may close quickly.


Estate and Gift Tax Exemptions Are at All-Time Highs

The current $11.58 million per individual ($23.16 million collectively for a married couple) federal gift, estate, and generation-skipping transfer tax lifetime exemption is scheduled to be reduced to approximately $6 million on January 1, 2026. Many believe, however, that this scheduled decrease could be accelerated depending on the outcome of the upcoming general election and that such a decrease could become effective as soon as January 1, 2021. While future changes to tax laws can’t be predicted with certainty, if you are contemplating making further wealth transfers, it may be prudent to consider making 2020 gifts that fully utilize your lifetime gift tax exemption in light of this potential “use it or lose it” scenario.

The preferred method for transferring wealth to a younger generation is to make lifetime gifts to one or more irrevocable trusts.

Making gifts in trust, rather than outright to individual beneficiaries, allows you to separate the timing of the gift (often driven by tax motivations such as those described above) from the timing of the distributions (driven by family and other non-tax financial factors). In addition, gifts to trust can provide you with tax and creditor protection benefits not available with outright gifts. If desired, the terms of the trust can give your beneficiaries significant (although not total) control consistent with enhancing tax and creditor protection goals.

Irrevocable trusts can be structured so that your transfers to them are completed gifts for estate and gift tax purposes, but allow you to remain the owner of the property for income tax purposes. Your ability to pay income taxes on behalf of these trusts (called “grantor trusts”) is not considered an additional gift, making this a potentially highly effective wealth transfer strategy.

In the absence of gifts, your surplus wealth will continue to accumulate, and at death, will be split between the government and your beneficiaries. By making gifts now, an irrevocable trust can effectuate a much better split between the government and your family members. Of course, the non-tax aspects of gifting are important. If you are concerned about having some ability to access the gifted funds in the future, you could name your spouse as a beneficiary of the irrevocable trust. A so-called “spousal lifetime access trust” allows the older generation to have access to the trust through the spouse’s beneficial interest during the spouse’s lifetime.

Interest Rates Are at Historic Lows

Today’s historically low interest rates create an important opportunity for tax-favorable wealth shifts from the older generation to the younger generation. In contrast to making gifts of today’s wealth by making a substantial gift to an irrevocable trust, gifts that take advantage of low interest rates help you take advantage of future growth in wealth.

Take, for example, a sale of assets to an irrevocable trust:

  • Assume you sell assets with a 2020 fair market value of $10 million in exchange for an interest-only, nine-year promissory note at the October 2020 minimum annual interest rate of 0.36% payable annually.

  • Such a sale would not be treated as a gift because the purchase price is equal to the current value of the property and because the interest rate on the note is equal to the federal minimum rate. Since there is no gift, no gift exemption is needed to use this technique, so the technique can be used by those who have already used their lifetime gift exemptions or as a supplement to gifts that use lifetime gift tax exemption.

  • If the property sold to the trust were to appreciate at, say, 10% annually during the nine-year note period, at the end of the nine years, the trust would retain, after repaying the note, approximately $12.9 million available for the trust beneficiaries, represented by the difference between the 10% actual rate of return earned by the trust and the trust’s 0.36% cost of funds.

There are many variations of this technique, including the grantor retained annuity trust (“GRAT”), where you receive annuity payments back from the trust rather than interest on note payments. The general idea, however, is the same: transfer future appreciation out of the older generation’s estate with very little gift tax consequences.

Plan Now

We often encourage clients to consider gifting as part of a year-end planning review. This year, we suggest acting sooner and potentially making transfers by year-end 2020. 

©1994-2023 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 293

About this Author

Peter M. Miller Estate Planning Lawyer Mintz Law Firm
Member / Chair, Private Client Practice

Peter is the Chair of the firm's Private Client Practice. He represents individuals, businesses, and charitable organizations in a broad spectrum of matters involving estate planning and administration, business income taxation, general business planning, and the creation and administration of private foundations and public charities.

Kurt R. Steinkrauss Business Attorney Mintz, Levin, Cohn, Ferris, Glovsky and Popeo
Member / Chair, Closely Held Business Practice; Co-chair, Private Equity Practice

Kurt chairs our Closely Held Business Group and co-chairs the Private Equity Practice. He has significant experience helping individuals and families develop and implement successful estate planning strategies. Clients count on his insights on evolving gift and estate tax laws to help them manage their assets effectively. Kurt also handles a variety of corporate and employment matters. He often counsels closely held businesses, start-ups, and emerging companies on corporate governance matters as well as sales, acquisitions, and M&A transactions. Kurt is an experienced speaker and...

Reena I. Thadhani Estate Planning Attorney Mintz, Levin, Cohn, Ferris, Glovsky and Popeo
Member / Chair, Estate Planning Practice

Reena manages the firm's core Estate Planning Practice and is one of Boston’s top-rated estate planning attorneys. She focuses on gift and estate tax planning and works closely with individuals and families to develop effective wealth management strategies. In addition, as a member of the firm’s Immigration Practice, Reena counsels clients on all aspects of immigration law, including pre-immigration planning. Generous in support of her colleagues and the greater community, Reena has volunteered her time to mentor a number of Mintz Associates and to work with various civic organizations....

Susan M. Kealy Estate Planning Attorney Mintz, Levin, Cohn, Ferris, Glovsky and Popeo
Special Counsel

Susan has extensive experience in the areas of estate planning, estate administration, trust administration, and the related areas of estate, gift, generation-skipping transfer, and income tax planning.

Her work involves counseling individuals and their families in developing and implementing tax-efficient wealth transfer strategies. In addition, Susan has substantial experience in all aspects of estate settlement and trust administration, including the preparation of estate and gift tax returns and fiduciary income tax returns.

Before joining Mintz, Susan was associated with...

Alison I. Glover Estate & Tax Attorney Mintz, Levin, Cohn, Ferris, Glovsky and Popeo

Alison’s practice focuses on estate and tax planning for high net worth individuals, their families, and their businesses. She advises clients on advanced estate planning techniques to minimize income, gift, estate, and generation-skipping transfer taxes.

In addition, she counsels fiduciaries and beneficiaries with respect to planning opportunities for trusts and estates and the resolution of disputes.

Alison also represents individuals and small businesses in tax controversies before the Internal Revenue Service and state taxing authorities. She successfully represents...