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You Can’t Take It With You: Part Two – Giving to Children

2 April 2025
Categories: Estate Planning, Finance, Taxes

Continuing from our previous discussion on education-specific gifting strategies, this article delves into four additional gifting strategies for your children. While outright gifts and intrafamily loans are relatively straightforward, Intentionally Defective Grantor Trusts (“IDGT”) and Spousal Lifetime Access Trusts (“SLAT”) are more advanced strategies that require careful planning and execution. Below we will explore each of these strategies, along with their respective advantages and disadvantages.

1. Outright Gifts

Outright gifts are perhaps the simplest way to transfer wealth to your children. You can give cash, stocks, real estate, or other assets directly to them. Each year, you can give up to the annual exclusion amount ($18,000 per recipient for 2024) without incurring gift tax or triggering the obligation to file a federal gift tax return. If you exceed this amount, you must file a federal gift tax return and the excess will count against your lifetime gift and estate tax exemption ($13.61 million per person for 2024).

Pros:

  • Simple and straightforward
  • Immediate benefit to the recipient
  • Ability to evaluate the beneficiary’s management and use of the gifted assets
  • No need for complex legal arrangements

Cons:

  • Loss of control over the gifted assets
  • Potential for a gift tax return if the annual exclusion is exceeded
  • Assets may be subject to creditors or poor financial decisions by the recipient

2. Intrafamily Loans and Loan Forgiveness

Intrafamily loans involve lending money to your children and charging interest at the applicable federal rate (“AFR”) – the minimum rate required between related parties.  In today’s interest rate environment, the AFR is significantly lower than what they would receive from a commercial lender.  Parents can also offer more favorable and flexible terms than commercial lenders, such as no downpayments, interest only loans, or extended payment periods.  Parents could later choose to forgive portions of the loan, effectively converting it into a gift.

Pros:

  • Lower interest rates than commercial loans
  • Flexibility in repayment terms
  • Can be structured to avoid gift tax implications initially

Cons:

  • Requires formal documentation and adherence to IRS rules to avoid being reclassified as a gift
  • Potential strain on family relationships if repayment becomes an issue
  • Interest income is taxable to the lender

3. Intentionally Defective Grantor Trust (“IDGT”)

An IDGT is an irrevocable trust that allows you to transfer assets out of your estate while retaining certain tax benefits. The trust is considered “defective” for income tax purposes because you, as the grantor, are still liable for the income tax on the trust’s earnings. This reduces the size of your taxable estate while allowing the trust assets to grow tax-free.  An IDGT can offer asset and creditor protection, while also servings as an effective prenuptial agreement for children, protecting their inheritance from potential future spouses without the awkwardness, hassle, and legal costs of negotiating with a child’s fiancée.

Pros:

  • Removes assets from your estate, reducing estate taxes
  • Allows for tax-free growth of trust assets
  • You pay income tax on IDGT earnings, further reducing your taxable estate

Cons:

  • Complex strategy that requires legal expertise to set up
  • Irrevocable, meaning you unable to amend, restate, or revoke the IDGT
  • You cannot reclaim the assets without consideration (or without adequate consideration) once transferred

4. Spousal Lifetime Access Trust (“SLAT”)

A non-reciprocal SLAT is an irrevocable trust where one spouse creates and funds a trust during their lifetime for the benefit of the other spouse and, potentially, children and grandchildren. The SLAT assets are removed from your estate, but the beneficiary spouse can still access the income and principal of the SLAT, providing you with indirect benefits. A SLAT works best for married couples who want to make significant lifetime gifts to children but have serious concerns about permanently giving away a significant portion of their assets that they may need later in life to maintain their lifestyle or to provide for their long-term care.

Pros:

  • Removes assets from your taxable estate
  • Provides financial support to the beneficiary spouse
  • Potential for significant estate tax savings

Cons:

  • Complex and requires careful planning and legal expertise
  • Irrevocable, limiting flexibility
  • If the beneficiary spouse dies, your indirect access to the SLAT may be lost

Conclusion

Choosing the right gifting strategy depends on your financial goals, the needs of your children, and your comfort with the complexity of each approach. Outright gifts and intrafamily loans offer simplicity and flexibility, making them ideal for more straightforward situations. For those with larger estates or more complex needs, IDGTs and SLATs provide advanced strategies to minimize taxes and protect assets. Consulting with an estate planning attorney can help you navigate these options and create a plan that best fits your family’s unique circumstances.