Currently, you can give any number of people up to $16,000 each in a single year without incurring a taxable gift ($32,000 for spouses “splitting” gifts). The recipient typically owes no taxes and doesn’t have to report the gift unless it comes from a taxed deferred asset or from a foreign source.

If your gift exceeds $16,000 to any person during the year, you must report it on a gift tax return (IRS Form 709). Spouses splitting gifts must always file Form 709, even when no taxable gift is incurred. Once you give more than the annual gift tax exclusion, you begin to eat into your lifetime gift and estate tax exemption (currently $12.06 million).

Some people use annual gifting below the annual exclusion amount year after year to keep their estate values below the lifetime exemption amounts.

An ILIT is an irrevocable trust that it is funded during your lifetime with one or more life insurance policies. An ILIT can help exclude your policy death benefit from your estate for federal estate tax purposes while maintaining the ability to direct how and when the death benefit is used.

You can use an ILIT in conjunction with annual gifting ($16,000 per donee or beneficiary in 2022) by using those gifts to pay the premiums on the life insurance in the trust.

An intentionally defective grantor trust (IDGT) is an irrevocable trust with an intentional “defect” which allows the trustmaker to remove the assets of the trust out of his or her taxable estate for estate tax purposes, while treating the trust as if it didn’t exist for income tax purposes (meaning the trustmaker continues to pay income tax on the income produced by the trust).

Assets can be gifted to the trust, or assets can be sold to the trust as an installment sale. When using an installment sale, the grantor exchanges property for a promissory note. However, because of the “defect,” the sale does not incur any capital gains or reportable income on the loan interest because the trust is ignored for income tax purposes.

IDGTs are generally funded using assets expected to appreciate significantly so that all the appreciation that occurs after the date of funding the trust will pass to the next generation without incurring estate taxes.

While the benefit of reducing or eliminating estate taxes using an IDGT can be a great benefit, careful consideration must be given to other consequences, such as giving up control of the asset, or the loss of the step-up in tax basis of an asset with a low tax basis, etc. At Tingey Law Group, PLLC we can work closely with you to analyze your current situation to help you determine whether an IDGT is right for you.