High-Lifetime-Exemption Gifting – Playing It Safe!


Having already been pestered to don her heavy winter overcoat in the middle of the night, the lady turned to the steward and scowled, “Why should I get into your little boat and leave this great big ship?”  As bands blared and bulbs blazed behind her on the 900-foot steel deck of the great liner Titanic, stepping into a swinging dingy as it dangled 70 feet above the black ocean surface did not seem the better choice.

Meanwhile Thomas Andrews, the designer of the colossal craft who knew her every bolt and ballroom, was receiving reports of leaks in the first five of the ship’s 12 compartments.  He knew this was enough to create a domino effect that would eventually fill the hull and ultimately spell the Titanic’s demise.

High-net-worth clients are faced with a quandary somewhat akin to that of the lady-on-the-liner

Should they put in motion a significant shift of assets out of their estate to take advantage of the temporary opportunity under the estate and gift tax law (for a quick review of the ins-and-outs of the current high lifetime exemptions – read the riveting article “Time, Tide, and TAXES Wait for No One”!).

Use of the generous lifetime exemptions must occur by December 31, 2025, before they drop by 50% under prescribed sunset provisions.  But transfers out of the taxable estate probably means giving up the control of and the benefits from those assets.  Add to this separation anxiety what we are hearing from insurance advisors: that some legal and tax advisors are suggesting delay as there might be a repeal of the sunset of the high exemption amount.

Fortunately, there may be a sensible planning-safe-harbor!  Consider:

A Sale of Assets to Intended Heirs (and the steps usually suggested, and to be affirmed, by legal counsel)

  •  Consider the assets to sell – Choose as if actual gifting was being done.
  • Determine the purchaser – This is usually an irrevocable third-party grantor trust for the benefit of intended heirs (which will be assumed). An existing trust may suffice, otherwise one must be established.
  • Purchase price – A reasonable and supportable fair-market-value of the assets chosen.
  • Payment – Evidenced by a standard commercial promissory note from the trustee requiring regular payment of a reasonable rate of interest.
  • Seed money – Most advisors suggest an existing trust corpus equal to a reasonable percentage of the amount of the note.
The Lifeboat or Not, Both Options Remain Open
  • If the sunset will occur as planned – As 12/31/2025 draws near, a timely forgiveness of the note will be treated as a gift of the property made during the high exemption period.
  • If the high exemptions are extended – The taxpayer can call the note, the trustee can repay in-kind by returning the property to the taxpayer who is then free to think about large gifts at a later time.

The sunset provision is not the last iceberg that will threaten your high-net-worth clients.  A young passenger named Violet Jessup survived the sinking of the Titanic, only to be on board the HMS Britannic in the Aegean Sea two years later when an explosion took the vessel down, but only after Ms. Jessup was safely adrift nearby.  We are ready to help you maneuver the serial obstacles as successfully as she.  Contact us about your planning issues at 706-614-3796 or tom@cpsadvancedmarkets.com!