Wondering what additional planning opportunities to consider now that you’ve used much, or all, of your gift tax exemption?

Caroline McKay

February 24, 2021

Four planning ideas that can help further your wealth planning goals

This is the fourth blog in a four-part series that focuses on purposeful planning this year amidst some uncertainty.
Read part 1: 
Is uncertainty preventing you from planning?
Read part 2: Considering whether life insurance fits within your wealth plan
Read part 3: Flexible gifting for possible tax reform

Many individuals accomplished significant wealth planning in 2020 and earlier by making gifts to take advantage of historically high gift and generation-skipping transfer (GST) tax exemptions. If you have already used a significant portion or all of those exemptions, but you would like to make additional transfers, the following are some strategies that could help you achieve your wealth planning goals:

1) Gifts

Even if you previously used your gift and GST tax exemptions in 2020 or earlier, you 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. 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. You can make certain gifts up to $15,000 per donee ($30,000 for married couples), which do not count towards your gift or estate tax exemption.
  • Direct payments for tuition and medical expenses. Without using your annual exclusion or gift and GST tax exemptions, you can pay for educational, dental and medical expenses for family members or friends as long as you pay 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 annual payment (annuity) from the trust for a specified term of years. GRATs can be used for a variety of assets, including concentrated positions and assets expected to appreciate significantly. Key characteristics of this strategy include:

  • 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 benefits of 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 you have already exhausted your gift tax exemption. 

3) Sale to grantor trust

The sale to grantor trust strategy takes advantage of the significant differences between the income and transfer tax treatment of irrevocable trusts. The goal of this strategy is to transfer anticipated appreciation of assets at a reduced gift tax cost. Key characteristics of this strategy include:

  • 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 especially timely for clients who have funded a trust using their gift tax exemption, as this technique typically requires some “seed” funding of the trust prior to a sale.  The ability to lock in current market interest rates, which are still trending very low, also can significantly benefit the overall transaction. 

4) Intra-family loans

An individual can make loans to family members at lower rates than commercial lenders without the loan being deemed a gift. Key characteristics of this strategy include:

  • An intra-family loan allows an individual to assist family members financially without incurring additional gift tax.
  • A bona fide creditor relationship, including the payment of interest, is established.
  • Wealth can be shifted if the loan assets are invested by the borrower and earn a higher return than the required interest rate.
  • Interest is paid within the family rather than to a third-party lender.

As interest rates continue to be very low, entering into new intra-family loans or refinancing existing loans for a lower interest rate remains an opportunity for 2021.

These are just a few of the strategies that you may want to consider for achieving your wealth planning goals. It is always important to work with qualified professionals when choosing and implementing your planning, but it is even more important this year as there has been much speculation about whether there may be tax legislation, retroactive or otherwise, that could impact the planning strategies discussed above. For more information on flexible planning in light of possible retroactive tax legislation, read our other Purposeful Planning pieces.  

Caroline McKay is a senior wealth strategist with CIBC Private Wealth’s Boston office, and has 13 years of industry experience. In this role, she works closely with relationship managers and clients to develop and implement estate and wealth transfer strategies as part of the firm’s integrated wealth management process.