Gifting Techniques for Today’s Estate Planning

Estate planning can be an emotional exercise for many people, and political uncertainty makes decision making more complicated. However, given that the current estate and gift tax environment is as favorable as it is likely ever going to be and the tax laws are reasonably transparent for this year, planners, individuals and families are advised to make the most of the current situation and move forward without hesitation to plan and execute estate and gift tax strategies.

The tried and true techniques described below still remain optimal for most wealthy estates. Strategies that involve maximizing gifting within the allowable lifetime estate tax exemption limits using assets that are expected to appreciate remain relevant. 

Annual Gifting. As of 2022, anyone can gift of up to $16,000 annually individually ($32,000 as a married couple) to any number of family and friends without tax consequences. Payments for a family member’s education or health care expenses are also exempt from the gift tax. This is the least complicated way to gift, but has obvious limitations.

Gifting of Interests in a Privately Held Family Business. If there is a family business that is expected to grow in value, consider gifting interests in this business to family members. This can also help ensure family succession in the governance of the business.

Gifting of Interests in an LLC or Family Limited Partnership that Holds Valuable Assets. Consider moving assets (such as real estate, marketable securities and/or the family business) into an LLC or a Family Limited Partnership and gifting minority or limited partner interests. Minority or limited partner interests will typically lack control, and are also considered less marketable and therefore less valuable than controlling interests. A gift of this type of interest could be valued and transferred at a considerable discount to the net value of the underlying assets. Minority interests in privately held operating entities can be similarly discounted.

Defined Dollar Value Formula Transfers. One way to gift hard-to-value property interests, such as privately held interests is with the use of a defined dollar value gift. Instead of identifying the gift as a number of units or shares in the subject property, the gift is a defined dollar amount of those units or shares. The object is to tie the dollar amount to the donor’s available gift tax exemption amount. This will allow for precision gifting without having to wait for asset or business appraisals to be completed in advance.

Intrafamily Loans. An intrafamily loan is a loan from one family member to another. If correctly drafted and administered, this type of loan can be a powerful tool for transferring wealth, free of gift and estate tax, from one generation to the next. Every intrafamily loan should be governed by a loan note that details the loan arrangement. The specifics can include, but are not limited to, whether the loan is a term or demand note, the length of the note, the applicable interest rate, the amount borrowed and the frequency of payments.

Trusts. Trusts are a common vehicle used for estate planning and are often used in combination with techniques described above. The world of trusts is not a one-size-fits-all proposition and is subject to ever-changing federal and state-specific laws, and certain types of trusts may fall in and out of favor at times depending on the degree to which they are subject to IRS scrutiny. The type of trust used as part of an estate plan should also reflect the unique wishes for how a donor’s assets are handled. There are four main types of trusts: inter-vivos, testamentary, revocable and irrevocable , the structure of which depends on the needs of the donor to receive an income stream and/or retain control while alive and can also provide assurances of how the funds will be distributed and used after the donor’s passing. Larger estates that are more complex and for which greater asset protection is needed will likely be advised to utilize irrevocable trusts such as a Spousal Lifetime Access Trust (SLAT), Grantor Retained Annuity Trust (GRAT) and Intentionally Defective Grantor Trust (IDGT). For philanthropic purposes, other trust types, such as a Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT), should be considered. 

The IRS recently proposed revisions to 2019 anti-clawback regulations regarding transfers that, if enacted, could limit the effectiveness of certain gifting strategies particularly those for which the donor retains significant control over the assets involved.  Practitioners should carefully evaluate how these proposed regulations might impact their estate plans and make adjustments if necessary.

The ideas described above are just a selection of available strategies, none of which will be appropriate in every case. Consulting with estate planning accountants and attorneys is critical for crafting a plan that fits the unique needs of each client and that will remain sufficiently adaptable to future legal changes, since tax regimes are never truly permanent. For more information, contact us. We are here to help.

Authored by Mike Hill, FASA, CPA, ABV, Alex Tittel, ASA, and Will Frazier, ASA. 

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