Unprecedented opportunities in gift planning.

• Author: Ankeney, Joylyn

With interest rates and asset values affected by the pandemic and other current events, tax practitioners have a unique opportunity to assist clients with some exceptionally advantageous wealth transfer planning. In addition, with the lifetime gift tax exemption set to revert to $5 million (adjusted for inflation) in 2026, and possibly earlier if Congress enacts new legislation, married clients with more than $23 million of combined wealth should be considering lifetime gifting strategies now. For clients who are projected to have a federally taxable estate and desire to gift assets to heirs, now may be the right time to implement some of the following planning strategies.

Historically low interest rates

As of this writing, the rates the IRS uses to calculate minimum interest rates to apply to loans (the "applicable federal rate") and the discount rate applied to remainder interests and life estates (Sec. 7520 rate) are the lowest ever published. The September 2020 Sec. 7520 rate was just 0.4%; two years earlier it was 3.4%. The historically low rate leaves a lot of room for clients to do some high-impact planning.

Grantor retained annuity trusts

A grantor retained annuity trust (GRAT) is an irrevocable trust in which assets are transferred with the grantor retaining the right to receive an annuity payment for a specified term of years. The trust assets remaining at the end of the term are distributed to the remainder beneficiaries, usually the grantor's children or grandchildren. A GRAT is a powerful planning technique when interest rates are low, because of the leverage it can provide. If the trust assets realize a return greater than the assumed rate, all of that appreciation is transferred to the beneficiary and is not included in the value of the gift. In addition, as long as the grantor survives for the term of the trust, the gifted assets are not included in the grantor's gross estate under Sec. 2036.

The key aspects of the GRAT are (1) funding the trust with assets that are expected to appreciate or provide income that will fund the annuity payment to the grantor; (2) determining the desired annuity payment amount; and (3) minimizing the gift tax impact of the transfer of the remainder interest to beneficiaries after the annuity term expires. The GRAT term is selected by the grantor but should be reasonable to provide the best opportunity for the grantor to survive the term and not cause the assets to be pulled back into the grantor's estate.

The following example of funding under the current Sec. 7520 rate (0.4% as of this writing) illustrates the importance of funding the trust with assets expected to appreciate:

Example 1: A parent funds a GRAT with $1 million of securities with a five-year term and a grandchild as the remainder beneficiary. If the trust provides an annuity payment of 5% ($50,000 paid to the grantor each year), the present value of the remainder interest is currently calculated to be $752,970. This is the amount of the taxable gift used against the grantor's lifetime exemption on the transfer to the trust. The key to making this beneficial is funding the trust with assets that will appreciate at a rate greater than the Sec. 7520 rate. If the assets in the trust only provide a 2% annual rate of return, the...