Many clients appreciate the transfer tax savings associated with making gifts during life, as opposed to waiting until death to transfer wealth, and have “maxed out” their available transfer tax exemption. For individuals who have made lifetime transfers in excess of current exemption amounts ($15 million per person in 2026), all is not lost. There are a number of estate planning techniques still available as well as techniques that can be used to enhance gifts that have already been made and trusts that are already in place.
Zeroed-out GRATs
To create a grantor retained annuity trust (GRAT), the grantor makes a gift to a trust. The trust agreement states that the trust will last for a certain number of years – two years, for example. The trust agreement also states that the trustee must pay an annuity to the grantor (this is the “grantor retained annuity” part of the trust) for as long as the trust lasts – in this case, for two years. After two years of annuity payments to the grantor, anything remaining in the trust passes to the grantor’s descendants.
The grantor makes a gift to his descendants on the day he creates the GRAT, since the lucky descendants are entitled to get something after two years; however, that gift is not equal to the amount the grantor put in the trust initially, since for two years, some of that money is flowing back to the grantor through the annuity. In order to determine the gift’s total, the Internal Revenue Service (IRS) releases a monthly hurdle rate and uses it to calculate how much the grantor gave away when he funded the trust.
What if you have little or no gift tax exemption amount remaining? You can create a zeroed-out GRAT: a GRAT designed to result in a taxable gift that is valued at or close to zero. This result is possible because the value of the gift is measured on the day the GRAT is funded, and the amount of the gift depends on the hurdle rate.
In a zeroed-out GRAT, the annuity payments are calculated so that if the assets in the GRAT appreciate in an amount exactly equal to the hurdle rate, after two years the trust will be empty, and there will be nothing transferred to the next generation. The gift is valued at zero (and reported as such on a gift tax return). Then again, if the assets happen to beat the hurdle rate, the gift was already valued and reported in the year the trust was created. Any assets above the hurdle rate pass to the grantor’s descendants gift tax free.
If the assets in the GRAT do not beat the hurdle rate, there are no negative tax consequences; the GRAT will just be fully depleted by making payments back to the grantor, and there will be nothing left to pass to the next generation at the end of the GRAT term.
Gifts and loans
Other strategies take advantage of current interest rates and lock them in, in the face of a rising rate environment. To put today’s rates in context, nearby is a chart showing some historical rates for loans between family members and how they stack up against current rates. We also include the hurdle rates for the same time periods. Loan rates assume annual compounding.
| Date | Short-Term Loan < 3 Years |
Mid-Term Loan 3 - 9 Years |
Long-Term Loan > 9 Years |
Hurdle Rate (GRATs) |
|---|---|---|---|---|
| January 2026 | 3.63% | 3.81% | 4.63% | 4.6% |
| January 2025 | 4.33% | 4.24% | 4.53% | 5.2% |
| January 2024 | 5.00% | 4.37% | 4.54% | 5.2% |
| January 2023 | 4.50% | 3.85% | 3.84% | 4.6% |
| January 2022 | 0.44% | 1.30% | 1.82% | 1.6% |
| January 2021 | 0.14% | 0.52% | 1.35% | 0.6% |
| January 2020 | 1.60% | 1.69% | 2.07% | 2.0% |
A client may lend money at these rates. If the child/borrower invests in assets that appreciate at rate in excess of the IRS-imposed lending rate, the child will keep the excess appreciation gift-tax free. Here’s an example of a client who took advantage of the low rates in 2021:
A father loaned his daughter $3 million for five years. The IRS has designated this as a “mid-term” loan, so the child had to pay her parent 0.52% interest, or $15,600, annually (see the bolded portion of the previous chart). This was a loan, not a gift, so the daughter also had to pay back the full $3 million after five years.
If the daughter invested the $3 million at BBH, or bought an apartment with it, and it grew at a rate greater than 0.52% before she had to pay it back, she would be able to keep that appreciation gift tax-free. If, for example, the $3 million enjoyed a 7% rate of return, her parent would pass over $1 million to the child free of transfer tax (see the chart below).
If the parent was feeling especially generous, he might decide to forgive interest each year using his annual exclusion (currently $19,000 per year).
Assumed rates of return
|
|||
|---|---|---|---|
| 0.52% | 3% | 7% | |
| Additional amount in child’s account (and out of father’s estate) after five years, as a result of this strategy (and forgiving interest) | $0 | $477,822 | $1,207,656 |
| For illustrative purposes only. | |||
Similarly, if you or members of your family have high-interest rate loans currently outstanding, and the borrower is in a lower generation, refinancing the note in a lower interest rate environment would be a relatively painless way of reducing your estate and passing some money to the borrower. The lower rate would mean less interest would be required to be paid back before the end of the note’s term. As long as there is some consideration for refinancing (i.e., it is not just a gift from the lender to the borrower, but there is some reason to refinance – a longer loan term, or perhaps a partial prepayment), this strategy should not result in gift tax or use of exemption. As rates rise, this strategy becomes less appealing; however, opportunities to refinance and/or restructure today’s intra-family loans if and when rates fall again should be considered on a regular basis.
Finally, the simplest estate planning strategy around is still available and very effective. The annual gift tax exclusion has increased over the years in $1,000 increments from $10,000 to $19,000 in 2026. This means that you can give away $19,000 each, to as many individuals (outright, or in a properly structured trust) as you choose, without incurring gift tax. If you plan to transfer wealth to grandchildren or more remote descendants, contact your estate planning attorney about generation-skipping transfer (GST) tax implications.
Planning with your dynasty trust
In 2012, 2020, 2021, and 2025, facing potential reductions in the lifetime exemption from transfer tax, many clients took advantage of their lifetime gift and GST tax exemptions by transferring assets to a dynasty or spousal access trust designed to benefit multiple generations without payment of transfer tax at each level.
Those dynasty trusts, once “seasoned” with assets that have been in trust for some time, present excellent planning opportunities. Many of these trusts were structured as grantor trusts, meaning that the trust gets to pass along its income tax bill to the client who funded it. The grantor/client and the trust are treated as the same for income tax purposes. This is nice for the trust beneficiaries (frequently the client’s children and grandchildren), because money is not taken out of the trust account and mailed to the IRS each year – instead, the parent writes a check to the IRS from a personal account, and the trust account continues to grow tax free.
So, for each year that the trust has taxable income and the parent pays its income tax bill, children and grandchildren are enriched in a manner that is not currently subject to gift tax.In case parents have second thoughts about this generous structure, some clients included a provision in the trust agreement allowing them to “turn off” the grantor trust status and decide when to shift the income tax burden to the next generation.
If you funded a trust in 2012 or over the past few years, this is not a “set it and forget it” wealth transfer strategy.
Because as discussed earlier, to the extent the trust assets grow at a faster rate than the IRS interest rates for intra-family loans, the trust has increased in value in a manner not currently subject to gift or estate tax. Even better, there is no income tax on loans between the grantor and a grantor trust because, as noted, they are the same person for income tax purposes. On the other hand, if the loan is not between a grantor and a grantor trust (for example, the loan between parent and child discussed earlier), the lender (parent) would pay income tax on the interest payments (even if interest is forgiven and not paid).
Shifting gears: From lifetime to testamentary planning
In the course of structuring new wealth transfer plans and enhancing existing plans, we hear many clients note that their wills and other testamentary documents haven’t been revised in years, and in some cases don’t reflect their current wishes. However, in the rush to create and fund new trust agreements, clients put wills and other testamentary documents aside to be focused on at a later date. So, just as you are breathing a sigh of relief and feeling as though you have finally accomplished your wealth planning goals, remember to also look back at your existing testamentary documents and, if necessary, update them to reflect any recent gifts.
If, for example, you used some of your exemption to purchase a home for one child in 2020, but your will currently provides that your assets pass equally to all of your children at your death, you may want to insert an “equalization clause” providing that your other children be made whole in light of the gift made to the first child during life.
Planning during life is so connected with testamentary planning that anyone who engaged in significant gifting in the past several years should take a look at her will and the interplay between that document and the planning accomplished so far.
If you are not sure whether your estate plan should be revised this year, your BBH wealth planner and relationship manager would be happy to take an initial look and provide some suggestions. Above all, it is important to assess your estate planning objectives and work closely with your BBH team, accountant, and estate planning attorney before moving forward with any of these strategies.
Fortunately, especially for those of us who have made a career of the practice, it seems as though despite (or because of) the flood of transfer tax transactions implemented in 2012, 2020, and 2021, in addition to the 2018 and 2026 increases in the transfer tax exemption amounts, estate planning will live to see another day!
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