Optimized Gift Trust (OGT) Frequently Asked Questions

Surprisingly, there is a lack of standardization in the field of estate planning such that the vast majority of irrevocable gift trusts fail to include all of the access and controls that are allowed by the Tax Code. There are many reasons, but some factors include (i) federal estate tax minimization planning is notoriously complex (it’s been referred to as the “brain surgery” of law), (ii) there are an extremely small number of attorneys that specialize in the unique “advanced planning” subset of estate planning (especially in geographic areas that lack significant wealth such that attorneys do not get enough “repetitions” to master their craft), and (iii) lack of experience results in inferior gift trusts (that often need to be redone, at significant expense).

This is an enormous problem since wealthy families must transfer the majority of their assets into these types of trusts to eliminate their estate tax. But if the irrevocable trust document does not contain sufficient access and control at the outset, the trust cannot be changed. Thus, a client with a non-optimized trust may not be able to access funds, change the beneficiaries, or take other important actions later in life. Like building a house, you must build a strong foundation from the outset to avoid costly and disastrous mistakes down the road.

Yes. The technical “white paper” supporting the OGT is featured in the May 2024 issue of the national Estate Planning Journal (widely viewed as the most esteemed professional journal in the tax and estate planning world). To publish an article in this journal, there is an extensive peer-review and fact-checking process performed by national experts in the tax and estate planning field. The OGT article was approved, as-is, without a single substantive change.

As of March 2024, we have funded ~200 OGTs without a single known IRS audit.(1) 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. Our OGT fee also covers all legal/accounting fees incurred in defending an IRS audit of your federal gift tax return with respect to the OGT design and structure.

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

Yes. The OGT should be funded well in advance of January 1, 2026, at which time the federal gift tax exemption is scheduled to be cut in half (per the “sunset” of the 2017 Tax Cuts and Job Act), reducing the amount that can be gifted to individuals (and gift trusts) during life or at death. As occurred in 2012 and 2021, this will lead to an enormous temporary surge in demand for qualified high net worth planning attorneys to assist with making large gifts by December 31, 2025, to fully-exhaust the gift exemption.

Yes. In 2019, the IRS issued Treas. Reg. 20.2010-1(c) providing that taxpayers who exhaust their exemption by making gifts before January 1, 2026, will effectively “lock in” their otherwise expiring exemptions.

Yes, it is possible. In 2021, Congress came dangerously close to passing “Building Back Better” (BBB) legislation which would have effectively abolished the use of “grantor trusts” (including OGTs). If passed, the BBB would have perhaps dealt the most serious blow to federal estate tax minimization planning in over 40 years. There are rumors that similar legislation could be enacted in the future.

Almost certainly. The proposed BBB legislation included “grandfathering” provisions such that OGTs funded prior to enactment would have been largely-exempt from the adverse legislation. In light of Constitutional limitations that generally prohibit retroactive tax law changes, it is expected that future legislation would also have similar “grandfathering” provisions. This underscores the importance of families acting well in advance of the next legislative attack.

You can transfer any asset to the OGT. However, the ideal assets to transfer are assets that you expect to significantly appreciate in value after the transfer (such as a business or investment real estate). If you believe that your business will be sold or significantly appreciate in the future, it is extremely important that you transfer the business to the OGT as soon as possible.

Yes, but it’s high. In 2024, an individual may gift up to $13.61M to an OGT (and a married couple may gift $27.22M). However, beginning January 1, 2026, these federal gift limits will be reduced to an estimated $7M for an individual and $14M for a married couple. Thus, as explained above, it is recommended that the OGT be funded well in advance of 2026 to “lock-in” the higher gift exemption.

Good news. Under current law, you can transfer additional assets to the OGT in exchange for a promissory note due back to you. The IRS generally allows OGTs to have a 10:1 debt-equity ratio. As an example, if you were to gift $10M to an OGT, you could transfer another $90M into the OGT and take back a $90M interest-only promissory note (without requiring any gift exemption for the $90M).

As Directing Investment Advisor, you have total control of the OGT’s assets and investments.

None – in fact, the OGT waives the statutory duties to diversify and invest in a prudent manner. This gives you broad control to invest the OGT without risk of fiduciary liability.

Virtually anything can be accomplished with the OGT – either directly or indirectly. For example, you can unilaterally borrow or “swap” assets with the OGT. If you are married, either you or your spouse may have SLAT powers, allowing the SLAT-powerholder spouse to directly withdraw money out of the OGT and change the beneficiaries. There are other access points that may require the consent of a “Trust Protector” (who is typically a close friend of yours or non-immediate family member).(2) Please review the “standard powers” and “enhanced powers” in the separate OGT Overview for a detailed explanation.

(2) Rest assured, the Trust Protector cannot make these changes without notice to you and typically the consent of your attorney. You also have the power to remove the Trust Protector at any time.

No. The OGT qualifies as a “generation-skipping trust” meaning that the assets can be passed down from generation to generation, without any inheritance taxes. Thus, your children and descendants never pay 40% federal estate taxes on any of the assets received from the OGT – forever.

No. There are no income taxes when assets are transferred from the OGT to your children. However, like all gift trusts that escape federal estate tax, the assets do not receive a “stepped up tax basis” at your death. Instead, the OGT’s tax basis in the assets transfers to your children. Thus, if and when the assets are sold in the hands of children, there could be capital gains.

No. The OGT assets are permanently protected from all of your heirs’ personal creditors, lawsuits, bankruptcy and divorcing spouses.

All income and gains (and deductions and losses) generated by the OGT assets are reported on your personal Form 1040 tax return. Of course, if you need cash to pay these taxes, there are many “access points” that allow you (and your spouse) to borrow or withdraw cash from the OGT. You can also stop paying these taxes at any time in the future (although this requires you to forfeit many of the “access points” so it is not recommended).

Yes. Your payment of the OGT’s income taxes produces a tremendous tax benefit. Known as “tax burn”, this is the single most powerful way of effecting wealth transfer since (i) the estate-tax-exempt OGT assets appreciate on a pre-tax basis, and (ii) the donor simultaneously “burns down” their taxable estate through the payment of increasingly larger income taxes (which the IRS famously ruled has no gift tax consequences).(3) As a direct result of this “tax burn” feature, virtually any individual with more than 20 years of life expectancy can usually eliminate their federal estate tax.

(3) In Rev. Rul. 2004-64, the IRS conceded that the donor’s payment of the OGT’s income taxes is not a gift, regardless of the amount of taxes paid.

It’s simple: your CPA files a one-time Form 709 federal gift tax return which is due April 15th of the following tax year. This return reports all gifts made to the OGT.

Most CPAs have experience with gift tax returns, but if not, we have several referral partners.

The IRS does not require income tax returns for the OGT (until after death). While you are living, the OGT’s Tax ID Number is your Social Security Number. Thus, all of the OGT’s annual income is reported on your personal Form 1040 tax return.

Cash and marketable securities (stocks and bonds) have readily-available values. However, for hard-to-value assets (such as operating companies), there are independent valuation firms that specialize in gift tax valuations. Typically these firms will value the company from a “defensibly low” position to minimize the use of your gift tax exemption. Although the valuation of a business can take 2-3 months, the valuation can occur after making the gift (so long as the transfer is properly-structured using a formula gift or formula sale clause) which is particularly important when there is an urgency to make a transfer to the OGT (such as at the end of 2025 or if a sale of a business is on the horizon).

Yes, but it’s unlikely. There is a 3-year statute of limitations for the IRS to audit your Form 709 gift tax return and there is a reported 1% audit rate for federal gift tax returns. Thus, if the IRS fails to audit within 3 years, the gift is “cleansed” and cannot be challenged by the IRS.

Do I pay gift tax? No. Whenever gifting hard-to-value assets (like a business), we include special formula gift clauses that prevent you from paying gift tax in the event of an IRS revaluation of the transferred assets. This clause was famously approved by the Tax Court in 2012.(4)

(4) Wandry v. Comm’r, T.C. Memo. 2012-88.

After completing ~200 OGTs and putting hundreds of hours into fine-tuning the OGT documents and process, we have streamlined the process so that it takes 1-2 short calls on your end. In most cases, the OGT account is ready to be funded within a matter of weeks (or much faster if necessary to meet a deadline).

Yes, we routinely set up OGTs for clients around the country.

OGT planning is notoriously complex. In most states, there may only be a half-dozen attorneys that truly specialize in “advanced estate planning” for high net worth families. But there are countless ways for an OGT to be disqualified through improper document drafting or faulty administration. To ensure quality control, you work exclusively with attorney Jonathon Morrison(5) who personally drafts all OGT documents and related memoranda from start to finish – you do not work with a junior attorney or paralegal. Mr. Morrison also interfaces with all your advisors to make sure the OGT is set up and administered properly.

(5) 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.

We provide you with a final “instruction manual” memo at the end of the process. This memo is sent to you and all of your advisors and explains all of the details for operating the OGT going forward. However, if you have any questions, you may reach out at any time. We do not charge for routine communications and annual reviews related to your OGT.

• Our law firm charges a one-time premium flat fee to set up the OGT based on our published fee schedule that is then in effect.
• We also offer a discount for multiple family members or business partners that engage us at the same time for OGTs.

• We cover the entire setup process, from start to finish.
• Additionally, unlike most law firms that charge ongoing hourly fees, our fee covers (i) annual review meetings, (ii) review and comment on draft OGT tax filings, (iii) all future communications with you and your advisors related to the OGT administration, and (iv) most additional transfers and transactions with the OGT in the future.
• Our fee does not cover (i) the independent valuation of the gifted assets (which is required for federal gift tax reporting if the OGT will be funded with assets other than cash and non-publicly traded securities), (ii) filing of the federal Form 709 gift tax return (which is handled by your CPA with our guidance), and (iii) the transfer of highly-unique and complicated assets into the OGT (including the creation of family limited partnerships or LLCs which is a separate charge).
• After setting up the OGT, we also review your core estate planning documents (wills; living trust; etc.) to determine whether any changes need to be made. If necessary, we can assist in updating these documents for a relatively minimal fee.

Yes. Our OGT fee also covers all legal/accounting fees incurred in defending an IRS audit of your federal gift tax return with respect to the OGT design and structure.

Depending on your situation, your tax preparer may deduct the OGT setup fee on either your business tax return or Schedule E (legal fees attributable to business income) or Schedule D (transaction expense) of your Form 1040 tax return. By deducting the OGT setup fee, most clients can effectively reduce the OGT fees by 40-50% (depending on their residence and tax bracket).

No. After the OGT is set up, you will not receive any additional invoices related to the OGT (subject to extremely rare exceptions, as explained above).