If you have not already been inundated with invitations to webinars, articles and newsletters regarding the estate planning you should consider doing before the end of the year, you undoubtedly will receive these over the next few months. The purpose of this newsletter is to provide our top ten thoughts for year-end planning. We are purposefully keeping it short and sweet. If you have any questions or want to discuss further, we are always available and ready to recommend and implement prior to the end of the year. Here they are:
One impediment to the implementation of a dynasty trust (a trust for a donor's descendants which can go on for many generations) is the loss of access to the gifted funds. However, for individuals who are married, they may just be able to have their cake and eat it too.
A SLAT is a technique that can be utilized by a married couple who want to fully utilize their enhanced gift tax exemptions ($11.58 million for each spouse in 2020), but also need (or desire) to retain access to the gifted funds. A SLAT is similar to a dynasty trust, except that the individual creating the SLAT also includes his or her spouse as a beneficiary of the trust. In situations where both spouses are seeking to fully utilize their exemptions, each spouse will create a SLAT for the benefit of the other spouse and their children and more remote descendants. Each spouse will then gift to the SLAT that he or she created assets having a value up to his or her remaining exemption amounts. The transfers to the SLATs will be taxable gifts. Each spouse will be required to file a gift tax return to report the gift and to allocate an appropriate amount of GST tax exemption to the transfer. As with the dynasty trust, by allocating GST tax exemption to the full value of the transfers, the assets in the SLATs will pass from generation to generation without the imposition of transfer tax.
By including the spouse as a beneficiary of the SLAT, the beneficiary spouse will have direct access to the SLAT assets (as a beneficiary of the trust) and the donor spouse who made the gift to the the trust will retain indirect access to the SLAT assets (as the spouse of a beneficiary). Thus, as long as both spouses are alive and married to each other, the marital unit will have access to all of the assets transferred to both SLATs. However, upon the death of the beneficiary spouse, or upon divorce, access to 50% of the assets will be lost to the donor surviving spouse because his or her descendants will be the only remaining beneficiaries of the SLAT that he or she created.
If a married couple owns assets in excess of two times the exemption amounts, but one spouse does not own in his or her individual name a sufficient amount of assets to fully utilize his or her exemption amounts, assets can be transferred between spouses as necessary to allow for the full utilization of both spouses' exemptions through the creation of two SLATs. This shifting of assets between spouses should not be subject to transfer tax as a result of the unlimited gift tax marital deduction. Although transferring assets between spouses is an effective way to ensure both spouses fully utilize their exemptions, clients may be reluctant to cede any control over the ultimate disposition of their assets by transferring them to a spouse — even if for purposes of implementing a SLAT structure.
SLATs need to be drafted carefully to avoid the so-called "reciprocal trust" doctrine. Under the reciprocal trust doctrine, if the SLATs created by each spouse for the benefit of the other have substantially similar terms, the IRS may argue that the SLATs should be "uncrossed," so that each spouse is deemed to have created a trust for his or her own benefit. If the IRS is successful, the intended planning will be defeated, as each spouse will be treated as having created a self-settled trust, which will be included in their respective estates for estate tax purposes upon death. To help reduce this risk, the SLATs should have — at a minimum — different independent trustees and the dispositive provisions should differ.