In Part 1 of this two-part series, we addressed the current federal gift and estate tax law provisions, the risk for legislative change to those provisions and certain planning opportunities that may be significantly less advantageous in 2021 to make gifts using a "dynasty" trust, a "SLAT," or an LLC structure and was published in the previous issue. Part 2 addresses additional planning techniques and considerations, such as the selection of assets to gift, the use of a grantor trust and/or self-settled trust, state estate and gift tax law provisions and other potential changes to federal law to be considered by taxpayers in 2020.

Selection of Appropriate Assets to Gift. In general, donees receive the same basis—known as carry-over basis—in gifted assets as the donor had in them (whether the gift is made in trust or outright). As a result, in the event that the donee then sells the gifted asset, the donee will pay tax on any capital gain in the asset just as the donor would have had to do. Alternatively, assets owned at death receive an adjustment in basis to make it equal to the fair market value of the asset on date of death. This permits the beneficiary of an estate to sell the bequeathed asset without recognition of gain in the value of the asset that occurred prior to the decedent's death. This difference in treatment of an asset's basis requires that basis should be taken into account in selecting which assets to gift—although part of the calculus should be the possibility of future law change (one of many in additional proposed changes—see below) that would apply carry-over basis to inherited assets. To minimize capital gain tax, gifts should be made of high tax basis assets and low basis assets should be retained by the donor so that the appreciation in these assets would under current law escape capital gain taxation following the donor's death. In addition, assets that are likely to appreciate in value are often the best candidates for gifting so that the future value appreciation is not subject to gift or estate tax in the donor's estate.

Use of Grantor Trust. Almost every trust created during the grantor's life for estate planning purposes can be structured as a "grantor trust" for income tax purposes which enhances the gift and estate tax advantages of the trust. A grantor trust treats the grantor as the owner of the assets of the trust for income tax purposes, but not for gift and estate tax purposes. As a result, the grantor is required to personally pay the income tax attributable to trust income—without having to treat such tax payments as additional gifts. Grantor trust status also permits the grantor to buy and sell assets from or to the trust without recognition of capital gain on the transaction. This flexibility can be useful to permit gifts of low basis assets to a grantor trust with the intention that the grantor will be able to reacquire them prior to death so that, under current law, their basis may be stepped up to fair market value at the grantor's death. A caveat, however, is to take into account in the calculus that changes to the grantor trust rules have been proposed that might restrict their advantageous treatment for future income tax years—for example, to restrict or eliminate the long-term ability for the grantor to buy low basis assets gifted to trusts in 2020 without capital gain recognition in a future tax year.