Federal estate, gift and GST tax exemptions are currently at historic highs ($11.58 million per individual in 2020). These higher exemptions are scheduled to return to $5 million, adjusted for inflation, after December 31, 2025, but they could be reduced before then as a result of political or policy changes.
Because of this potentially limited window to take advantage of the higher transfer tax exemptions, many individuals are making—or at least considering—large gifts while the exemptions are certain. However, not everyone is ready to give away a significant amount of wealth in case those assets are needed in the future. For those who are concerned they may need to access gifted assets in the future, the following are some strategies that can build flexibility into gift planning to address that concern:
1. Spousal Access
One option that married couples have for flexibility is spousal access to any gift made. This is often in the form of a spousal lifetime access trust (SLAT). A SLAT is a type of irrevocable trust that includes the grantor’s spouse as one of the beneficiaries. The married couple is able to take advantage of the gift tax exemption because the trust is funded during life, but they can also retain access to the trust’s assets through the ability of the grantor’s spouse to receive income and principal distributions. A few considerations when using spousal access include:
• If both spouses wish to create a SLAT to provide each of them access to trust assets, care must be taken that the trusts are not substantially identical. For example, the trusts can be created at different times, funded with different amounts and contain different terms.
• When creating a SLAT, “spouse” can be defined in a variety of ways, including the current spouse only or including the current spouse and any future spouse. For someone who is not married, including a future spouse may allow for spousal access later.
2. Special Power Of Appointment
A special power of appointment is a power granted to an individual (the “powerholder”) to direct trust assets to a specified person or class of people (other than the powerholder, the estate of the powerholder or the creditors of either). This type of power generally allows the powerholder to direct distributions to one or more people, change the beneficiaries of the trust and/or change the terms that apply to the trust as long as the directions are consistent with the power of appointment granted. When including a special power of appointment in a trust document, some important considerations include:
• The permissible appointees of a power of appointment generally can be as broad or narrow as the grantor chooses. The grantor can even be a permissible appointee for outright distributions in many circumstances.
• If the grantor is a permissible appointee, then special care must be taken when choosing the powerholder(s). To avoid any argument that the trust was always intended for the grantor, the trust could require multiple powerholders, or a third party, agree to any distribution.
3. Trust Protector
A trust protector is a person who has powers over the trust but is not the trustee. • Trust protectors are growing in popularity for several reasons, including:
They can address trust issues and solve problems that weren’t—or couldn’t have been—anticipated at creation.
• They often have the power to remove or replace trustees, change beneficiaries, divide the trust, change administrative provisions, or change trust situs.
• In states like Delaware that allow for self-settled asset protection trusts, the grantor can even be part of the class that can be added as a beneficiary of the trust by the Trust Protector.
4. Disclaimer
A disclaimer is when a gift recipient renounces part or all of a gift transferred to that recipient. 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 the grantor 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.
• In order for there to be favorable tax treatment of the disclaimer, the disclaimer must be a “qualified disclaimer” by meeting 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 a grantor trust and, if the sale is for 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 the grantor has had more time to decide whether to make a gift and of how much.
• The grantor can contribute the promissory note to a trust that qualifies for the lifetime marital deduction and decide when the grantor 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 the note, there may be some valuation discounts that apply to the value of the note depending on the circumstances.
Including flexibility in planning is always important, but it can be particularly important when tax laws and family circumstances may change. The strategies outlined above have many variations and can often be used in conjunction with each other. They are also just a few of the options that you may want to consider. It is critical to work with qualified professionals when choosing and implementing the planning that is best for you and your family.
Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with 17 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.
