Most marketable, mnemonic sales-oriented trust and estate planning efforts (e.g., SLATs [spousal limited access trusts)] are greatly oversold, in my opinion. I am not opposed to the use of SLATs, but believe strongly they are being marketed with over-weighted accolades that fail to reflect crucial tax and non-tax checklist items and other important considerations. As a practitioner, I try my best to review trust and estate sales efforts from the perspective of an informed customer, rather than simply from a seller’s view. My upcoming Leimberg webinar will cover an array of these different SLAT factors and issues that can help you better serve each particular client; and touch on the potential alternative or complimentary use of inter-vivos QTIP trusts. Click here for details about my upcoming webinar.
The popularity of SLATs (spousal limited access trust) is, in my view, a great marketing spin. But, in most cases, SLATs are being oversold.
Oversold for the following three key reasons:
(1) A Secondary Interest for the Settlor Spouse? How can (or will) the settlor spouse who creates and funds the SLAT obtain any interest in the SLAT in the event of the early death of the beneficiary spouse? Other than possibly inclusion of an unpredictable limited power of appointment under the terms of the SLAT, I simply cannot find an effective way to protect the settlor spouse. Also, in my view it is only by using an inter-vivos QTIP trust can the settlor spouse retain a secondary interest in the QTIP trust in the event the beneficiary spouse predeceases the settlor spouse without that retention triggering later estate inclusion for the settlor spouse for estate tax purposes. See Treas. Reg. Section 25.2523(f)-1(d)(1); see, for example, IRS Private Letter Rulings 200406004 and 200413011.
In addition, even if one can find tax-law support to avoid estate tax inclusion for the settlor spouse’s secondary interest in, e.g., a SLAT or inter-vivos QTIP trust, that tax planning becomes painfully illusory and ineffective if local state law treats the settlor spouse’s secondary interest as a self-settled trust for creditor claim purposes; thus likely triggering estate inclusion for estate tax purposes. See, for example, Rev. Proc. 76-103.
As to these protective state statutes, the North Carolina statute under N.C. Gen. Stat. Section 36C-5-505(c)(1) is an excellent, well-drafted statute for protecting a settlor spouse’s secondary interest. A copy of this NC statute in included in my recent SLAT speech outline I refer to at the end of this blog post. But, again simply having a protective state statute, even this NC statute, is of no value if the settlor’s secondary interest is a retained interest for federal estate tax purposes.
Not all is lost, however.
These excellent, protective state statutes do lay the foundation for some highly effective incomplete-gift SLAT and inter-vivos QTIP trust planning in situations where the settlor spouse’s funding of the trust is purposely designed as an incomplete gift for gift tax purposes. One might ask: so why bother with a SLAT or inter-vivos QTIP as an incomplete gift? My response is because the tremendous benefit of this incomplete-gift irrevocable trust set-up can provide outstanding asset protection and greater assurance the trust property will remain only within the settlor and beneficiary spouse’s family, and ultimately for their children. Reduces, as examples, the risk to the family assets of old-age, widow or widower predatory marriages, mismanagement of assets, Madoff schemes, etc.
(2) Divorce of the Spouses? This opens up numerous potential problems with SLAT planning well beyond the scope of this blog post. I address this topic much more fully in my SLAT outline referenced below. However, various planners who assert the SLAT can simply include a “movable” definition of “spouse”, or can effectively apply by its terms to a new subsequent spouse, are in my view simply wrong. In addition, most of the above protective state statutes I find dealing with a secondary interest for the settlor spouse mandate that the same beneficiary spouse to whom the settlor spouse is married at the time the trust is created must also continue as a beneficiary of the trust until that beneficiary spouse’s death. These statutes typically do not allow creative efforts in support of these shifting definitions of the beneficiary spouse.
(3) Long-Arm Jurisdictional Litigation Statutes. Any effort to create a trust in another state jurisdiction in order to avail the settlor spouse of more favorable laws in that state can quickly sink if the settlor’s home state’s long-arm jurisdiction statute can (easily in many cases) pull the out-of-state trust into the home state’s litigation arena.
This jurisdiction subject is too broad for this blog post. However, I cover this long-arm statute point and the above two preceding points in a comprehensive recent speech I gave on SLATs at the recent 67th Seattle Estate Planning Seminar. Click here for a pdf copy of my SLAT speech outline [this is a box.com link].
Also contact me if you have any questions or wish to discuss any of these points. firstname.lastname@example.org
As part of my shift away from litigation and return predominantly to trust and estate planning, I will be speaking at the 67th Annual Seattle Estate Planning Seminar, October 24-25, 2022 (Seattle, WA). Click here. My topic is “Will Your SLAT Fit the Right Slots?“. Come join us. The seminar blurb for my presentation is:
“The trust planning interest in SLATs (spousal lifetime access trusts) has become exponential over the past several months. Cocktail party fodder. Almost an effortless sell. This presentation touches on certain SLAT checklist items and potential pitfalls that may otherwise get overlooked in the SLAT design, such as the effect of divorce, substantive postnuptial agreement issues, creditor claims, the relation-back doctrine, long-arm litigation (jurisdiction) statutes, potential Code Section 2036 issues, cash-flow needs, and a brief commentary on fundamental differences with an inter-vivos QTIP trust.”
I continue to believe the inter-vivos QTIP marital trust is one of the best options for tax / asset protection trust planning, especially during 2022 in view of the unsettled uncertainty about Congress reducing the estate / gift exemption. Click here for my 1.12.22 Leimberg newsletter. You are welcome to print, pdf, and forward this newsletter to anyone else. Please also contact me at email@example.com if you have any thoughts or questions about this QTIP trust planning.
Last week I attended the first virtual, remote University of Miami 2021 Heckerling Institute on estate planning. As usual, there was a great deal of good, thought-provoking information. I am, however, greatly looking forward to the actual post-Covid on-site 2022 Heckerling Institute next year.
Here, very briefly, are two take-aways. I plan periodically to present more of these short take-aways in future blog posts:
One is that the inter-vivos QTIP marital trust (my long-running favorite estate planning tool) appears to be one of the best options for a married couple to take advantage of the current $11.7 million estate / gift exemption before possible federal legislation to reduce that large exemption arises ($23.4 million combined for a married couple). This QTIP option is akin to using a SLAT (spousal lifetime access trust), but better, in my view, as the QTIP election feature provides the unique ability to wait-and-see so as to make, or not make, the QTIP marital deduction election for the inter-vivos QTIP trust, until after the smoke clears on what, if any, changes Congress might make in reducing the gift / estate exemption.
But, keep in mind the QTIP trust funding itself is locked-in in all events; only at play (a very important play) is whether the spouse who funds the QTIP trust ends up being able to use the current large exemption amount. As an important aside, some states (including Georgia) have a protective statute that prevents a creditor from reaching a secondary QTIP interest, by that creditor otherwise asserting the secondary interest is a self-settled interest back to the settlor spouse. This favorable statutory protection enables the inter-vivos QTIP trust, up front, to include a secondary QTIP interest for the settlor (funding) spouse in the event the other QTIP beneficiary spouse predeceases the settlor.
If use of the large gift exemption is thereafter thwarted — in part or in whole — for whatever reason (e.g., a Congressional retroactive reduction in the exemption amount), the amount of exemption applied to the QTIP gift can be effectively adjusted downward by the offsetting use of the QTIP marital deduction election. The QTIP election (including a partial election) does not have to be made until the due date of the gift tax return Form 709 for the 2021 QTIP trust gift. This gift tax deadline, if extended, is October 15, 2022. Thus, the binding exemption-effect of now using the excess gift exemption to fund the QTIP trust can be deferred with no fixed, rigid commitment until October 15, 2022.
Two is the importance of the separate trust share rules under Internal Revenue Code Section 663(c). This is very important when one’s estate planning set-up includes separate trust shares for each child, grandchild, etc. The separate trust share treatment under Section 663(c) insures that each child / grandchild, etc., is tagged only with the DNI arising from his or her trust share. [DNI is “distributable net income”.]
Otherwise, there can arise anomalies — without the separate trust share treatment — where one trust beneficiary receives a trust distribution that (undesirably) carries out excess taxable DNI to that recipient beneficiary, as a result of an inclusion in the DNI calculation of undistributed DNI as to the other trust beneficiaries. Adding separate share language to the trust instrument helps avoid this imbalance and makes clear the Code Section 663(c) separate trust share rule applies in these multiple-beneficiary trust situations. Below merely is a sample provision:
“8.9 Separate Trust Shares. As to each trust share under section 8.4 above, I intend that each such trust share be treated as a separate economic interest (separate trust share) as to each beneficiary for whom the trust is created under this Article VIII with the result that each separate trust share is not affected by the economic interests accruing as to the interests of another beneficiary or class of beneficiaries.”