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The impact of estate and gift taxes and exclusion amounts on estate planning strategies must be regularly monitored and assessed as they differ every year.

With IRS’ recent announcement of the new inflation-adjusted numbers for 2022, estate and gift tax exemption are climbing up to higher figures which means that the rich taxpayers can gift more to their heirs tax free during life or at death. (Learn more about the 2022 estate and gift tax exemptions by reading this article.)

The tax proposals as contained in the “Build Back Better Act” that attempt to make major changes to the present estate and gift tax laws are dynamic and have impacts to estate planning strategies.  (Read here to learn more about the expected changes on estate and gift tax according to the BBBA.) The opportunity is to take advantage now in advance of a change in the law.

There are several legitimate estate and gift planning techniques that can reduce estate and gift taxes. You might want to consider the following planning opportunities:

Use It Now (while you still have time) or Lose It Forever

Fundamentally, an estate/gift tax exemption is a “use it or lose it” scheme. IRS already publicized that should affected taxpayers failed to take advantage of the present high gift exemption before the changes, the benefit will be gone forever. Anyone who utilizes the higher exemption amounts before the law sunsets in 2025 won’t be penalized even if they would die after the decreased amount is implemented.

Giving partial interest in the property (i.e. interest in real estate of an LLC) may be helpful since the value (for gift tax purposes) can be reduced by specific discounts like a discount for lack of marketability and / or lack of control.

Marital Transfer

Make use of the Spousal Lifetime Access Trusts (SLATs) to allow your spouse continued access to trust income and / or principal (with some restrictions). The SLATs is a smart strategy for the ultra-high-net-worth and high-net-worth individuals who want to make use of the increased exemption amounts but are not comfortable handing over access to the gifted assets (if ever it is needed in the future).

Another strategy is to establish inter vivos marital trust for married couples so contributions into the trust will be eligible for the unconstrained marital deduction (for gift tax reasons). It’s imperative though that this marital trust is structured and it is qualified under the requirements and restrictions for the contribution to meet the terms of the marital deduction.

Use a “Savings Clause”

Utilization of a “savings clause” in a deed of gift is yet another planning method as there are varied forms of savings clause that aim to limit the amount of a gift. Be careful though in using this strategy because IRS may disapprove savings clauses as they can be seen as ineffective (depending on how facts are presented on each case).

Use a “Disclaimer Planning”

Making use of “disclaimer planning” for gifts into trusts if you are worried that major changes will not be ratified in the short-term to give you an opportunity to amend the plan without fearing the adverse tax consequences. Just make sure that you are executing the disclaimers cautiously and be in compliance with the state law and federal tax laws.

Family Limited Partnership

Those who own closely held business interests should consider making gifts so they can take advantage of the potential benefits from valuation discounts. For those who are part of a family limited partnerships or family limited liability companies, now is the right time also to hand over control of the entities to lock in a discount and eradicate or reduce the risk that the preserved control will cause the entire FLLC or FLP to be subject to estate tax despite of a previous gifting.

Charitable Transfers

The charitably-inclined should consider charitable planning strategies as this approach reduces the size of the estate as lifetime gifts have a significant benefit to income tax reduction. The gifts can be given in such a way that the donor preserves the right to use the gifted asset or income until death.

Selling to Intentionally Flawed Grantor Trusts

Consider selling to intentionally flawed grantor trusts wherein those who do not have a substantial amount of estate and gift tax exemption available would have the donor set up a trust, gift some assets, and then sell the rest of the assets to the same trust in exchange for a promissory note. This strategy has to be executed properly for it not to be treated as a taxable gift and the assets that were sold to the trust will not be included on the contributor’s / grantor’s estate.

QSBS (Qualified Small Business Stock).

Benefit from the significant exemptions from federal income tax on capital gains through the use of a trust or trusts for QSBS (qualified small business stock).

Applying for a GRAT (Grantor Retained Annuity Trust) Now

The proposal to increase the minimum term of two years to ten (10) years and requiring a gift value of at least 25% of the total value would abolish the “zeroed-out” GRAT method and could possibly eradicate the usefulness of the GRAT given the mortality risk related to the longer-term GRATs. Consider applying a GRAT now prior to the enactment of the tax law changes. This method is applicable to all types of clients regardless if they have maximized or not their tax exemptions.

Take Advantage of the Current Low Interest Rates

Take advantage of the low interest rates (which have been historically at low levels because of the present economic conditions) for executing new intrafamily loans (the same could also be used for refinancing other existing loans with higher interest rates). These loans do not require the use of any gift or estate tax exemption and you can later on convert these loans to gifts in the future (depending on the condition of the law at the time).

Transfer to Minors

Transferring to children while they are still minors is classified as gifting and is included in the exemption for lifetime gifts. The gift is given to the guardian of the child and is then distributed to him once he reaches the age of maturity.

Transferring Small Amounts of Estate to Irrevocable Life Insurance Trusts

When small amounts of a person’s estate (which is equivalent to the amount of the premium of a life insurance) is transferred to an irrevocable life insurance trust, the size of his taxable estate is reduced while building a much larger asset outside of the estate (which is the proceeds of the life insurance which are not taxable).

Private Annuity Sale

The process of selling an asset to a younger generation as barter for an unsecured deal to pay yearly amounts to the seller for the latter’s lifetime removes the sold asset from the seller’s estate (despite having the amounts of the payments to the seller still part of his estate).

Need Help with Your Estate and Gift Tax Planning?

When working on your estate and gift planning, you should factor in all aspects of a wealth transfer plan. We, at Credo CFOs & CPAs, are experienced in understanding how legislative proposals evolve. Also, being the best in the field of valuation, we carefully conduct all valuation engagements in compliance with the given professional standards to protect your interests in the process of transferring your wealth.