Optimized Gift Trust (OGT): Transfer Assets Out of Estate While Maximizing Retained Access & Control Over Transferred Assets

April 4, 2024 | News

As detailed in my peer-reviewed article that will be featured in the national Estate Planning Journal next month, the optimized gift trust (OGT) is designed for clients who need to make large, irrevocable transfers of wealth out of their estate for federal estate tax minimization and/or creditor protection purposes (including gifts made in anticipation of the upcoming 2026 tax law change that will result in partial forfeiture of unused gift exemptions).

Not all irrevocable trusts are created equal: the OGT is a “state-of-the-art hybrid trust” as it brings together and incorporates features from many types of gift trusts (including irrevocable generation-skipping trusts, dynasty trusts, IDGTs, SLATs, ILITs, silent trusts, and asset protection spendthrift trusts). By combining these features into a single hybrid trust, the donor continues to retain maximum access, control and flexibility over the transferred assets, while minimizing IRS audit risk (particularly in comparison to more aggressive vehicles and designs, such as “crisscrossed SLATs”, “BDITs”, “MegaTrusts” and “678 Trusts”).

Overview of Benefits

The OGT offers all of the following primary benefits:

  • Assets Permanently Exempt from Estate Tax. The OGT qualifies as a “generation skipping dynasty trust” meaning that the OGT assets (including all post-gift income and appreciation occurring within the OGT) escape the 40% federal estate tax at the donor’s death and can be transferred from each generation to the next generation of descendants without the 40% federal estate tax – forever.
  • Maximum Retained Access & Control. Despite the so-called “irrevocable” nature of gift trusts (which is required to exempt the gifted assets from estate taxes and personal creditors), the distinguishing feature of the OGT is that the donor retains maximum access, control, and flexibility over the irrevocably gifted assets by virtue of the “standard” and “enhanced” powers (detailed below). For married couples, the “spousal life access trust” (SLAT) powers greatly increase the marital unit’s access and control over the OGT assets.
  • Asset Protection. The OGT assets are immediately and permanently insulated from the donor’s (and the donor’s heirs’) future creditors, lawsuits, and divorcing spouses.
  • Pay the OGT’s Income Taxes Without Gift Consequences (Tax Burn). The OGT’s “intentionally defective grantor trust” (IDGT) feature allows the donor to pay the OGT’s annual income taxes (in a landmark 2004 ruling, the IRS conceded that this is not a gift, regardless of the amount of taxes paid). This is a powerful way of effecting wealth transfer since the OGT can appreciate on a pre-tax basis, while simultaneously “burning” down the donor’s taxable estate. (This feature may be turned off if paying the taxes becomes burdensome.)
  • QSBS Stacking. For certain qualifying “C” corporations: if the OGT is funded in advance of the sale of the business, the OGT can be subdivided to multiply (“stack”) the $10M QSBS exclusion from capital gains.

Standard Powers. The following standard powers of the traditional OGT are firmly supported by IRS rulings and caselaw (legal citations will be provided in an upcoming Estate Planning Journal article):

  • Investment Power. At all times, the donor controls the OGT investments, without restriction.1
  • Borrowing Power. The donor may borrow assets from the OGT in exchange for an interest-only balloon note. Since IRS-set interest rates are at historical lows that can be locked in for up to 30 years, borrowing is an ideal way to access the OGT’s cash.
  • Swap Power. In addition to borrowing, the donor may also “swap assets” of equivalent value in and out of the OGT, for any reason. Swapping illiquid assets for cash is another way to access OGT funds.
  • Cancellation of Gift. The OGT contains disclaimer provisions that provide a 9-month “cooling off period” and allow the Trustee to retroactively cancel gifts made to the OGT as if they never occurred.
  • Trustee Removal/Replacement. The donor may remove and replace any Trustee or successor Trustee, with or without cause, at any time.
  • Privacy. The OGT includes “silent trust” provisions to (i) prevent the Trustee from disclosing OGT-related information to beneficiaries, and (ii) instead provide the donor (and other trusted persons following the donor’s death) with all OGT-related information (as “designated representative”).

Enhanced Powers. The following enhanced powers may also be included in the OGT for greater control, although the cautious, non-regular exercise of these powers is recommended: 2

  • SLAT Powers. For married couples, the OGT may include “spousal life access trust” (SLAT) provisions to give one spouse (but not both spouses) the following additional powers (perhaps with an “equal footing” provision that negates the spouse’s powers if there is a divorce):
  • The power to serve as Trustee of the OGT;
  • The power to withdraw cash or other assets from the OGT (as Trustee and beneficiary), subject to a required “health, education, support and maintenance” standard;
  • The power to appoint (gift) OGT assets in favor of family members and/or charities; and
  • The power to appoint assets back to the donor-spouse in a trust that is exempt from death tax and creditors.
  • Trust Protector Powers to Remove Beneficiaries and Redirect OGT Assets. A close friend or non-immediate family member may serve as “Trust Protector” (subject to the donor’s removal power) and possess powers to address unexpected changes in tax, family, and economic circumstances, such as:
  • The power to remove (and reinstate) a child’s (or grandchild’s) interest in the OGT, for any reason; and
  • The power to redirect the OGT assets away from a child (or grandchild) to the donor’s remaining children, grandchildren, siblings, and/or charities.
  • Power to Appoint Assets Back to Donor. The Trust Protector may possess a so-called “SPAT” power authorizing the appointment (gift) of OGT assets back to the donor in the event of an emergency. 3
  • Self-Trustee. If necessary, the donor may serve as Trustee of the OGT with the power to control distributions, subject to a required “health, education, support and maintenance” standard. 4
  • Tax Reimbursement Power. The OGT may authorize an independent Trust Protector to, in his or her discretion, reimburse the donor for income taxes that the donor pays on the OGT’s income (discussed above).

Funding Options. The OGT can be funded in many different ways depending on the donor’s needs:

  • Gift (or Formula Gift). The donor can gift assets to the OGT or “cap” the value of the gift to their federal gift tax exemption (pursuant to a Wandry formula clause) so as to protect against gift taxes in the event of an IRS audit and revaluation of hard-to-value assets (such as a business or real estate).
  • Sell Assets to OGT in Exchange for Note. Donors who either (i) need access to income produced by the gift assets, and/or (ii) wish to transfer additional assets to the OGT (but have exhausted (or forfeited) their lifetime gift exemption) may sell assets to the OGT (without capital gains tax) in exchange for an interest-only note. In addition to allowing for additional transfers of assets to the OGT without use of the lifetime gift exemption, the added benefit of a sale is that it gives the donor the ability to (i) receive back a portion of the assets from the OGT in the future (via note repayment which the donor may calibrate to their income needs and direct the Trustee to prepay at any time without penalty), and/or (ii) forgive the note in the future (as a gift, assuming sufficient gift exemption is then available). A sale to the OGT is also private in that it is not reportable on a federal gift tax return.
  • Gift-Buyback. A donor may gift and then borrow/buyback a portion of the gifted assets from the OGT to continue to enjoy the assets in the same manner as prior to making the gift. This is particularly important if the gift exemption is expected to be reduced in the future (such as on 1/1/2026 when the federal gift tax exemption is scheduled to be cut by ~50% unless utilized before then). Borrowing or buying assets from the OGT has no immediate adverse income tax consequence.To Illustrate a gift buyback transaction:
  • Joe gifts investment real estate to the OGT having a value of $10M and files a gift tax return reporting the gift. The IRS has 3 years to challenge the gift (there is a reported 1% audit rate).
  • After some time, Joe directs the Trustee (or exercises his “swap power”) to purchase the $10M investment real estate in exchange for a $10M 20-year interest-only balloon note. In essence, Joe has not parted from the $10M investment real estate – he still has the same $10M investment real estate in his name.
  • The results are as follows:
  • Joe successfully used $10M of his federal gift exemption.
  • Joe can continue to enjoy the rents from his investment real estate (since he purchased it back).
  • At any time, Joe may pay down the $10M note by transferring cash or other assets to the OGT.
  • If Joe is involved in a lawsuit, the $10M debt reduces his personal assets available to creditors.
  • If Joe dies with the $10M note outstanding, Joe’s estate has a debt of $10M owed to the OGT which reduces Joe’s taxable estate. Therefore, estate tax is not imposed on the $10M debt.

Please review the separate gift-buyback memorandum for risks, defenses and best practices for this strategy.

Legal/Accounting Fees. We charge a one-time published flat fee to create and set up the OGT. The fee represents a small fraction of the research and development time and costs that went into custom-tailoring the trust document and refining the process. The legal setup fee is also tax-deductible against self-employed business income to the extent that the fee primarily relates to tax or creditor protection planning for a business. Once set up, ongoing legal and accounting “upkeep” expenses are minimal. The OGT typically results in one additional investment account. We do not charge for annual meetings or routine communications. Other than a one-time gift tax return, there are no ongoing tax returns for the OGT. Additional one-time setup fees may include (i) legal and accounting fees for transferring assets into the OGT and/or performing financial projections, and (ii) independent appraisal fees for hard-to-value assets (required for gift tax reporting).

Audit Risk. As of March 2024, we have created and funded more than 200 OGTs without a single known IRS audit. 5  The OGT will also be the feature article in the nationally-regarded, peer-reviewed Estate Planning Journal, the top national legal journal in the field of estate planning law. In the event of audit, our law firm Frazer Ryan (the

predominant tax and trust planning law firm in Arizona) has multiple former IRS litigators who have reviewed the OGT strategy and stand ready to defend it.

Legacy. The trust agreement underpinning the OGT originates from one of the oldest and most prominent estate planning law firms in Silicon Valley and has been utilized by hundreds of founders, executives, and venture capitalists associated with leading high-tech companies, including Google, Apple, Facebook, Twitter, Nvidia, and Tesla. More than 200 hours of “R&D” were spent to fine-tune the terms to produce the OGT.

Timing. To meet time constraints, we have refined the process to allow for creation and setup of the OGT within 72 hours, if necessary.

The Optimized Gift Trust – Fee Information & Process

Not all irrevocable gift trusts are created equal. We charge a premium one-time flat fee for the Optimized Gift Trust based on a published fee schedule that reflects the following unique factors:

  1. Optimized Gift Trust Maximizes Retained Controls and Access. As explained in the accompanying Overview, the donor retains superior access and controls over the gifted assets. The majority of “plain vanilla” irrevocable trusts offer a limited amount, if any, of these controls. This is critical since many clients transfer the majority of their assets into these types of trusts – but if the irrevocable trust document does not contain sufficient access and control at the outset, it cannot be changed. Thus, the client may not be able to access funds, change the beneficiaries, or take other important actions later in life. This represents the primary value proposition for the Optimized Gift Trust.
  2. Complexity & Difficulty of Legal Issues. Irrevocable gift trust planning is notoriously complex. The consequences of a failed or inflexible irrevocable trust can be catastrophic and can require expensive court proceedings and notice to beneficiaries if a change is desired or, worst case, a complete forfeiture of the tax benefits. The majority of estate planning attorneys and advisors are not intimately familiar or knowledgeable with the “ins and outs” of all the specialized variants of irrevocable trusts (IDGTs; SLATs; BDITs; etc.) Thus, the difficulty of the technical legal issues involved is extremely high.
  3. Extensive Research & Development. In light of the above-described complexity, more than an estimated 200 hours of research and development (representing over $150,000 of billable time) was required to develop the Optimized Gift Trust (including the trust agreement, explanatory memorandum, tax reporting and administrative memorandum, process, overview, and ancillary documents), including time needed to (i) analyze the federal income tax, gift tax, and estate tax rules of all aspects of the Optimized Gift Trust (including research of the Trust Protector’s powers from an IRC Section 2036, 2028 and 2041 perspective), and (ii) develop this special variant of trust that provides a high degree of donor flexibility and control and relatively minimal and measured risk from an income tax, gift tax and estate tax audit perspective (assuming the Optimized Gift Trust is properly administered and reported, and subject to disclosures and added risks of inclusion of “enhanced” provisions).
  4. Reduced Audit Risk. The research that went into the Optimized Gift Trust translates to a decreased risk of a successful IRS audit. In addition to the Optimized Gift Trust being successful in achieving the desired tax benefits, this provides added comfort that the client will save significant potential legal and accounting fees to defend an expensive audit.
  5. Personalized Attention. To ensure the highest level of quality control and responsiveness, the Optimized Gift Trust is prepared exclusively by Senior Partner Jonathon Morrison 6 without any assistance from junior attorneys or paralegals – this is extremely important given the complexities and difficulties that can arise if a trust is improperly drafted. Every document is hand-prepared and customized by Mr. Morrison for the client’s personal situation.
  6. Repetitions Count. As of March 2024, Mr. Morrison estimates that he has been involved in more than 500 advanced planning cases involving irrevocable trust planning in his career. Given the complexity, audit risk, and long-term nature of this type of planning, it is important that the drafting attorney have hundreds of repetitions which is necessary to not only mastering the trust vehicle and tax consequences, but also identifying tax and non-tax issues based on the family’s situation that require special drafting in the trust and unique aspects in the design of the gift plan.
  7. Quick Turnaround. As explained in the overview, Mr. Morrison can architect, draft and fund an Optimized Gift Trust in as short as 72 hours, if necessary to meet funding deadlines. Most law firms require a minimum of 3-4 weeks to draft and fund advanced planning strategies such as irrevocable trusts and do not have the capacity to handle dozens of gifting transactions that typically occur near the end of a tax year (particularly where a change in tax law is anticipated).
  8. Optimized Gift Trust is Less Expensive and Less Risky than Other Strategies. There are not many vehicles that offer tax benefits similar to the Optimized Gift Trust. Whereas all standard provisions of the Optimized Gift Trust have been formally or informally approved by IRS rulings, the Tax Code and/or Treasury Regulations, several other widely-used gift trust vehicles (namely, “criss-crossed SLATs”, “BDITs”, “678 Trusts”, and “Megatrusts”) offer similar retained access and controls, but with heightened IRS audit risks. In addition, in many cases, the fees for these trusts far exceed the flat fee that is charged for Optimized Gift Trust planning.
  9. Future-Proof. The Optimized Gift Trust is designed to be the only major irrevocable gift trust that most clients need for their lifetime (subject to unanticipated tax law changes). The trust is designed to be ultraflexible and “future-proof” so that, given virtually any scenario, we can amend the trust without a major structural overhaul or court involvement. Once established, ongoing accounting fees are minimal.
  10. Pedigree. The law firm, Frazer Ryan, is consistently ranked by statewide publications as a Top 3 Tax and Estate Planning law firm in Arizona. With ~25 attorneys exclusively dedicated to tax, trusts and estates, we are the largest boutique Arizona law firm of its kind. Specifically, we have ~10 estate planners, ~5 dedicated trust/estate litigators, ~5 dedicated tax litigators (including former IRS trial attorneys), and numerous guardianship/conservatorship and special needs attorneys (including a full-time registered nurse on staff that acts as a care coordinator).

 1 Duty of diversification is waived; concentrated positions are permitted; full indemnification for liability associated with losses.

 2 Unlike the standard powers, the enhanced powers may add risk of estate inclusion under I.R.C. Section 2036. On one hand, the existence of the enhanced powers is widely believed to be acceptable and defensible based on longstanding IRS guidance and/or taxpayer-friendly caselaw. On the other hand, the risk is largely dependent on how often and to what extent the powers are exercised during the donor’s lifetime. Upon audit, the IRS reserves the right to review the history of the OGT to determine whether there was an “implied arrangement” between the donor, the donor’s spouse, and/or the Trust Protector that may rise to the level of estate inclusion under I.R.C. Section 2036. (See Rev. Rul. 2004-64.)

 3 Although the IRS has not specifically authorized this power, it is believed to be defensible so long as (i) there is not an implied arrangement between the donor and the Trust Protector, and (ii) the donor retains sufficient assets for expected lifestyle expenses. This is particularly true in states such as Arizona which have enacted trust and creditor laws that support SPAT powers.

 4 Despite favorable caselaw going back to 1947, the 2017 case Estate of Powell heightened risks of a donor serving as Trustee. Moreover, a donor’s failure to abide by the trust terms in making distributions can increase audit risk. It is recommended that a donor resign and nominate an independent trustee at some point prior to death.

 5 Circular 230 disclosure: audit risk should not be considered when making a tax planning decision; we cannot guarantee the absence of an audit.

 6 Mr. Morrison’s legal practice is focused exclusively on designing and implementing advanced tax minimization and estate planning solutions for affluent families and business owners with large and complex estates. Prior to his return to Arizona in 2015, Mr. Morrison practiced for nearly a decade with top firms in Silicon Valley, including the personal tax planning group associated with the preeminent international venture capital law firm, Wilson Sonsini, which led IPOs for virtually every major Silicon Valley-based company, including Apple, Google, Amazon, Tesla, Twitter, LinkedIn, Netflix, Pandora, and GoDaddy. During this time, Jonathon worked exclusively with clients having 9-11 figure net worths and served as a trusted advisor to hundreds of the wealthiest individuals in the world, including founders, C-level executives, “Midas List” venture capitalists, and angel investors associated with top tech companies.

Are you interested in taking the next step? Click the button below to fill out our OGT Qualification Worksheet.

OGT Qualification Worksheet 

As of March 2024, Jonathon Morrison estimates that he has been involved in more than 500 advanced planning cases involving irrevocable trust planning in his career. At Frazer Ryan Goldberg & Arnold LLP, we have created and funded more than 200 OGTs without a single known IRS audit. Circular 230 disclosure: Audit risk must never be a factor in deciding to proceed in any tax planning strategy. There is no guarantee that an audit will not occur. All aspects of the OGT are firmly supported by the U.S. Tax Code, Treasury Regulations and IRS rulings (please refer to the full-length Estate Planning Journal article coming next month for all legal citations).