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News & Thought Leadership

Alternative to the $5 million Gift Exemption

While many consider the option of using a $5M gift exemption, it may not be the best option for everyone looking to transfer their wealth.   Gifting is likely still the best option for those with large estates, but we recognize that a $5M gift is not the appropriate solution for everyone.  Some of you, especially if you are younger, you may not feel comfortable giving away $5M of your estate, money that you can never get back.  Others may not want to gift any more than the State Estate Exemption amount.  Whatever the reason, we have an alternative solution for you. 


Be sure to take advantage of a low AFR:

Alternative to $5 million Gifting

First, Application Federal Rates (AFRs) are rates published monthly by the IRS in accordance to the Internal Revenue Code section 1274(d).  These rates are used to determine the original issue discount, unstated interest, gift tax as well as income tax consequences of below-market loans.  Here is why should should take advantage of a low AFR:


  • By loaning a sum to a grantor trust, you will be able to utilize the arbitrage between the low current AFR and the interest income that the trust will generate.


  • The income the trust generates will be used in two ways:  1) tax-free payment of interest back to the grantor; and 2) payment of premiums for the trust-owned life insurance policy, leaving a legacy for future generations.


The best part of this strategy is that as the grantor, you will receive your principal back from the trust at the end of the loan term.  In a relatively short time (typically a 3 or 9 year loan term is used in order to coincide with the short- and mid-term AFR) these funds are used to pay premiums on a life insurance policy.


Rates have been lowered again for August:

  • The 3-year AFR is now 0.25% and the 9-year AFR is 0.88%.



Attached is a presentation that will better illustrate what a great alternative this is to $5 million gifting.   As you will see with a 3-year loan of $3M to a grantor trust, the trust can purchase a life insurance policy with a guaranteed death benefit of $1.53M on the life of the grantor and his spouse. This loan will be repaid in the 4th year, after it has done all of the work necessary to provide a lasting legacy for their heirs.


Click here to view a sample Trust Arbitrage Presentation.


If you wish to hear more about this gifting strategy, give us a call at 212.695.7495 and we can answer any additional questions you may have.

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Arthur Grutt