Having Your Cake And Eating It Too – Ideas For Creating Trusts With Maximum Flexibility In Mind

June 18, 2020

By: Ira W. Zlotnick

As many of you are aware, the Tax Cuts and Jobs Act was passed into law in December 2017, and changed the federal estate, gift and generation-skipping transfer tax landscape.  In particular, the estate, gift and generation-skipping transfer tax exemptions were increased to a historical high of $11,580,000 per person for 2020.  These increased exemptions, however, are not permanent, and are scheduled to sunset on December 31, 2025, and could, in fact, be scaled back earlier if the Democrats take control in November. Moreover, even if Republicans remain in power after the upcoming election, many advisors are increasingly concerned that they too may seek to reduce these exemptions prior to their scheduled sunset to make up for lost revenue as a result of the ongoing pandemic.  With this as a backdrop, we have been advising our clients who are in a position to make large gifts and avail themselves of these increased exemptions to do so before the opportunity potentially disappears. 

For those married clients who are concerned about giving up access to large sums of money, designating a spouse as a discretionary beneficiary of a trust to which the gift has been made might be desirable.  These trusts, often referred to as Spousal Lifetime Access Trusts (“SLATs”), can provide a grantor with indirect access to the trust fund through his or her spouse so long as the spouse is alive and the couple is married.  In fact, married couples often create "not quite reciprocal" SLATs for each other to utilize the exemptions of both spouses and to ensure that each spouse is a beneficiary of at least one-half of the gifted property in the event of the death of the other.

Alternatively, for those married clients who wish to have more direct access to the gifted funds, as well as for those clients who are not married, a domestic self-settled spendthrift trust structure should be considered.  There are now eighteen states, with the most recent addition being Connecticut, that have enacted legislation that allows clients to utilize their gift tax exemption by establishing a trust for their own benefit and, if properly drafted and administered, still excluding the trust fund from the client's estate for estate tax purposes.

While being a beneficiary of the trust or having your spouse be a beneficiary of the trust is often desirable for a client who is concerned about giving away too much, there are times when such structure might not be advisable, and thus there are other mechanisms for ensuring that the grantor has access to the trust fund, if needed. One technique would be for the client to consider creating a Special Power of Appointment Trust (“SPAT”). A SPAT is a type of trust that gives a third party the power to direct the trustee to make distributions to anyone in a particular class such as a class consisting of the descendants of the grantor's grandparents.  This power, which is held by the powerholder in a non-fiduciary capacity, would even allow the powerholder to direct the trustee to make a distribution to the grantor, thus providing enormous flexibility if the grantor ever needed a distribution. Other ways of providing flexibility might include allowing the trustee to lend money to the grantor or the grantor’s spouse with or without interest and/or with or without adequate security or giving the beneficiary a power to re-direct the remaining trust property at the beneficiary’s death (sometimes referred to as a “broad testamentary power of appointment”.) as he or she sees fit.

In sum, there a variety of ways for clients to structure trusts to utilize their increased gift tax exemptions while retaining the ability to access those funds if needed and we encourage those of you who are interested in “having your cake and eating it too” to reach out to us to explore what might work best for you and your family.