How To Use Irrevocable Gift Trusts To Take Advantage Of Your Estate And Gift Tax Exemptions

Before the presidential election, many wealthy taxpayers were worried that a “blue wave” would mean a reduction of their $11.58 million estate, gift, and generation-skipping transfer tax exemptions. That’s because the Democrats were expected to propose lowering those exemptions back down to the $3.5 million to $5 million range they were before President Trump signed the 2017 Tax Cut and Jobs Act.

Even though that blue wave was more like a blue ripple, it’s still possible that the Democrats could gain control of the Senate. Right now, the Senate is split 50-48 between the GOP and Democrats, and we won’t know who won the final two seats until the run-off elections in Georgia on January 5. If both Democratic candidates prevail, a 50-50 Senate will tilt to the Democrats because the vice president casts the deciding vote in the event of a tie. In the face of this uncertainty, it could make sense to move some assets out of your estate now to ensure you reap the benefits of the higher exemptions.

One of the best ways to do that is to put the assets into an irrevocable gift trust, which enables you to make large gifts without giving up control and enjoyment of those assets.

For example, let’s say you and your spouse have a net worth of $60 million, which consists of both marketable and private investments, as well as your primary residence, vacation home, and personal assets such as cars and dogs. Also, assume that you still have $20 million of your joint $23.16 million estate, gift, and generation-skipping transfer tax exemption left.

Although you may not want to give that $20 million to your children now, if a new tax law reduces the current exemptions, you and your spouse would each end up paying an additional $2 million to $3 million in gift and estate taxes. By putting that $20 million into an irrevocable gift trust, you essentially move those assets from one pocket to the other in a way that shields them from the 40% estate and gift tax.

How Irrevocable Gift Trusts Work

When properly structured, an irrevocable trust enables you to avoid additional estate and gift taxes while preserving the hallmarks of asset ownership: control and enjoyment. Control means you have the power to decide how to invest those assets, such as whether to buy, sell, or hold shares of stock, or to give them to someone else. Enjoyment is the ability to use the income or other proceeds from the assets as you see fit.

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