Tax Planning Strategies for 2021

The uncertainty surrounding the election and possibility of changes to the tax law led many families to make substantial wealth transfers in 2020, especially as the historically high gift and generation-skipping transfer (GST) tax exemptions were so advantageous. This recent article from Financial Advisor, “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021,” discusses the options that are still available for 2021.

Gifting is Still a Good Strategy. Even if you used your gift and GST tax exemptions, you may still make additional gifts outright or in trust using the 2021 inflation adjusted amount. The gift and GST tax exemptions are indexed for inflation, so this year the exemptions went from $11.58 million in 2020 to $11.7 million for 2021. Annual exclusion gifts allow individuals to make gifts up to $15,000 per person, and $30,000 for married couples, which do not count towards the gift and estate tax exemptions.

Direct payments for medical and tuition payment are still good options that won’t deplete the annual exclusion or gift and GST tax exemption. Just be sure to make the payment directly to the qualified educational institution or medical provider.

Grantor Retained Annuity Trusts (GRATS) still work. A GRAT is a special type of irrevocable trust. The grantor makes a gift of property in trust, retaining the right to an annual payment (annuity) from the trust for a specified amount of time. They can be used for a number of different assets, including assets expected to appreciate significantly. Check with your estate planning attorney to be sure this is a good option for you. If the grantor dies within the annuity term, the entire value of the trust generally will be included in the estate, as if it had never been created.

Sale to Grantor Trust. This strategy takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciated assets at a reduced gift tax cost. 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 cases, when the trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but as two separate entities for transfer tax purposes. Because of this, neither the sale nor the note payments trigger income taxation.

Intra-Family Loans. These loans can be made at lower rates than by commercial lenders without the loan being deemed a gift. This lets an individual help their family members financially, without triggering additional gift tax. Wealth may be shifted, if the loan assets are invested by the borrower and earn a higher return than the required interest rate. Interest is to be paid within the family, and not to a third-party lender.

The intra-family loan establishes both a bona fide creditor relationship and the payment of interest. Family loans can be financially advantageous and emotionally tricky, so navigate with care. Your estate planning attorney will create the proper documents and all parties need to be clear on the details.

These strategies will work best when integrated into your estate plan. Discuss with your estate planning attorney to ensure that they will align with your long-term goals, as well as your tax planning.

Reference: Financial Advisor (Feb. 24, 2021) “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021”

Estate Planning Options to Consider in Uncertain Times

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning tools to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others, while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”