Big Changes to Trust Taxation Part II

Part II – Big Changes to Trust Taxation Could be Coming. Are You Prepared?

Dear Clients, Colleagues and Friends,

A number of our readers contacted us to ask what ideas we had to combat this potential change. Here is one potential planning tip that allows you to have your cake and eat it too:

With the possibility that the exemption will be reduced during the 2021 year and that it can be effective as of January 1, 2021, some tax practitioners are recommending that the trust receiving the $11,700,000 gift in early 2021 disclaim the gift immediately after the effective date of the legislation is announced by Congress. There are concerns that make a disclaimer extremely complex with potential unintended consequences. The “disclaimer” is the process where the donee refuses to accept the gift.

How About a Simple Alternative?

Senior generation (G1) funds an irrevocable grantor dynasty trust with a small taxable gift. G1 proceeds to sell the discounted interest in a family partnership or LLC to the grantor trust for a 25 year promissory note at the long-term AFR (the typical installment sale to a grantor trust).  As the transaction is deemed to be a sale for adequate consideration there is no gift. If Congress does not change the exemption this year, then all that GI needs to do by year end is gratuitously cancel the note receivable and report the value of the cancelled note as a gift. If Congress reduces the exemption, the client does not cancel the note.

Assume G1 funds a family limited partnership with $13,333,333 of marketable securities. Using a conservative 25% valuation discount, G1 sells the limited partnership interest to the grantor trust for a $10,000,000 long-term note, payable interest only at the long-term AFR for 25 years. All note principal due in 25 years. When G1 cancels the note, the value of the note at that time is a gift. Given that the AFR is a below market rate, the value of the note can be discounted!!! So, the advantage is two levels of discounts (the “Biden two-step”). Based on the 25% discounts the IRS has been allowing on long-term split dollar loans, the gift upon the cancellation of the note is limited to $7,500,000.

This is far less complicated than using trustee disclaimers and provides the flexibility to wait for what may occur in tax changes.

Contact Kathryn Weber at the firm if you would like to schedule a complimentary consultation. (949) 333-8152.

Jeffrey M. Verdon, Esq. Jeffrey M. Verdon, Attorney at Law

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the: Jeffrey M. Verdon Law Group, LLP at or 949-333-8143.

Posted in Asset Protection, Client Alert, Taxes / Laws.