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Election What-Ifs: Promissory Notes and Irrevocable Trusts


With the ever-changing political climate, uncertainty in estate and gift tax exemptions has reared its ugly head. Even though a change for the worse in the estate tax would not occur until after legislation is passed, tax laws passed during the calendar year 2021 could be retroactively effective as of January 1, 2021.


So how can you plan to avoid potential danger to your current estate plan with only 3 months left in 2020? If you have a potentially taxable estate and are concerned about losing a considerable amount of estate tax exemption, there is a two-step process that could be utilized.


- The first step would be to sell assets to an irrevocable grantor trust for a promissory note. You would (a) contribute some “seed capital” to an irrevocable grantor trust and (b) contribute other assets to a family limited partnership (FLP) or family limited liability company at a discounted valuation. Then after a “cooling off” period, you would sell a significant portion of your FLP interests (up to 99%) to the irrevocable grantor trust. You could transfer the “seed capital” assets at present valuation to the irrevocable grantor trust. The sales price would be satisfied by a long-term, low-interest promissory note. For gifts given in 2020, a taxpayer has until October 15, 2021 to file a gift tax return (Form 709), assuming that a proper extension is filed. This means that you have until October 15, 2021 to decide what to report on the gift tax return, and what valuation reports will be done to provide adequate disclosure for the return.

- The second step depends on the outcome of the 2020 Election:

v If Trump is re-elected, the installment sale can be undone. You can transfer (i) some; (ii) all; or (iii) none of the FLP interests back to you from the trust and cancel the note with no income tax or gift tax consequences. Only the seed capital gift to the trust will remain in trust.

v If Biden is elected, and the Democrats have a majority in the House and Senate, then you should consider before the 2020 year-end using what remains of your $11,580,000 gift tax exemption. You can do that by simply cancelling all or a portion of the note (a cancellation of debt results in a gift). If the note, or a portion of it, is canceled by a gift, a gift tax return will need to be filed disclosing the note cancellation.

v And so, regardless of who wins the election, your immediate estate tax planning concerns can be addressed by using this technique.

As always, elections have consequences, not just in politics, but in everyday life. We hope that this was informative for you. Let us know if we can help you further.


References: The Biden 2-Step for Wealthy Families: Why Affluent Families Should Immediately Sell Assets to Irrevocable Trusts for Promissory Notes Before Year-End and Forgive the Notes If Joe Biden Is Elected: A/K/A What You May Not Know About Valuing Promissory Notes and Using Lifetime Q-Tip Trusts - Alan S. Gassman, Jerome B. Hesch & Martin B. Shenkman retrieved at https://gassmanlaw.com/wp-content/uploads/2020/09/Thursday-Report-Issue-287.pdf

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