Silver Lining for the Affluent in this Challenging Tax Season

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Gift tax returns are truly a gift for wealthy tax filers. Due to glitches confounding the IRS for a third pandemic year the focus is on individual returns, not gift tax ones, which are filed far less frequently. Last year, donors could give $15,000 each to as many relatives, friends or other recipients as they wished. Advisors and accountants know that the annual gifts don’t cut into a taxpayer’s lifetime exemption from the 40% estate and gift tax. That makes them an ideal way to move assets out of an estate. For 2021, which covers returns now being filed, individuals could pass $11.7 million ($23.4 million for married couples) to heirs without triggering the levy. The levels are due to fall back by half come 2026. For 2022, the gift tax exemption is $16,000.

Gift tax returns go hand-in-hand with the strategic tax planning that wealth advisors have raced to conduct for their clients over the past year amid potential tax changes. Many trusts, an engine of wealth transfer, are seeded with gift money that typically requires a gift tax return.

How can a gift of $15,000 or less be valuable to people whose net worth has many zeroes? When it’s used in tandem with a special trust- Beneficiary Defective Inheritance Trust or BDIT. Start with giving away as little as a few thousand dollars to a beneficiary defective inheritance trust. Then a donor can set into motion a path for its heir to shield millions of dollars from estate taxes.

A BDIT is an irrevocable trust that’s set up for a child, grandchild or other person. It lets a beneficiary manage and use its assets without causing them to be included in her estate. Under current tax law, it can be initially funded with up to $5,000 in cash. At a future date, it can be filled with assets that are expected to grow in value, like shares in a private company. The beneficiary sells the shares to the trust in exchange for a promissory note under which the trust pledges to repay. Promissory notes often have “balloon” terms, meaning that they’re not repayable for 30 years.

Taxpayers generally file a gift tax return only when gifts are over the $15,000 mark. But returns must be filed for gifts of any size involving “future interests” in property or assets, an arrangement that typically involves a trust. Contact one of our estate planning professional at to discuss this option further and see if it the right fit for you.