Welcome to TaxView with Chris Moss CPA Tax Attorney.
Parents and Grandparents who are thinking about the next few generations for estate planning may want to consider a Spousal Lifetime Access Trust or SLAT for 2019. Create the SLAT in a state that allows for Domestic Asset Protected Trusts (DAPT) and you have the perfect trust for estate planning. The married gift tax exemption for 2019 is $22.8 Million, the largest in history. Depending on the outcome of the 2020 Presidential and Congressional election, best practice in estate planning for 2019 is to gift now rather than later to the next generation. The SLAT/DAPT combination in my view is the best way to go to keep your assets protected and safe for generations to come, allow for dramatic reduction of estate taxes, and as secondary benefit, annual income tax deductions as well. But beware—as gift tax returns are filed with the IRS, the Government waits, patiently I might add, for your passing to audit your estate, claiming that the SLAT assets never really left your estate and those assets now are taxable upon your death. So if you want to know the best way to set up a bullet proof SLAT so you can win any IRS estate audit after your passing, please stay with us here on TaxView with Chris Moss CPA Tax Attorney.
In order to best understand the concept of the SLAT I suggest you all read my 2015 article on Spousal Lifetime Access Trusts and Domestic Asset Protection Trusts (SLATs and DAPTs). I always couple my SLATs with DAPT’s in asset protection states. There are now 17 DAPT states by law: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.
So, what is a SLAT? First and most important SLATs are for married couples only. Husband Trust 1 gifts to his children all his assets and appoints his wife as Trustee. Wife Trust 2 gifts to her children all her assets and appoints her husband as Trustee. If this trust was created in a friendly asset protection state like Virginia, an independent Virginia Trustee would be appointed for both trusts. The reason why a SLAT is considered the perfect married couple trust is that you are not only able to remove all your assets from your estate with no estate tax upon your death, but you are also while alive able to care for you spouse and still live very comfortably even though you have given all your assets to your children and grandchildren. This is possible only with the “ascertainable standard” defined as your spouse’s health, education, maintenance or support. The Independent Trustee as well as the Spouse Trustee must have “absolute discretion” on whether or not to make these payments because herein lies the first IRS trap as the “ascertainable standard” trap.
Under IRS Reg 26 CFR 20.2041-1 (c)(2) a power of the trustee to make distributions for the health, education, or support”, an “ascertainable standard” is not a power of appointment so even a spouse trustee can have this power. However, if the Trust requires such distributions and does not give the Trustee absolute discretion to make such distributions, there is a good chance the Trust will not be asset protected against creditors as was the case in Ducket v Enomoto decided in 2016 in the US District Court of Arizona. In that case the IRS tried to impose a tax lien on the trust. Under Arizona law, the state where the trust was created, a beneficiary may sue a trustee for money owed. Under the terms of the trust the Trustee was required to support the beneficiary as follows: The trustee shall pay to Enomoto so much or all of the net income and principal of the trust as in the sole discretion of the Trustee may be required for support in the beneficiary’s accustomed manner of living, for medical, dental, hospital, and nursing expense or for reasonable expense of education including study at college and graduate levels. The Court concludes that because the “Trustee shall pay” was used and not “may pay” the beneficiary had sufficient rights over the Trustee to allow the IRS lien to pierce the trust. IRS wins, Enomoto loses.
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Also watch out here for the Reciprocal Trust Doctrine IRS trap. The Reciprocal Trust Doctrine is an old doctrine fully developed in United States v Estate of Grace, 395 U.S. 316 (1969). In that case the decedent Joseph Grace executed a trust instrument providing for payment of income to his wife Janet for her life. Shortly thereafter, Mrs. Grace executed a virtually identical trust instrument naming her husband as a life beneficiary. After Mr. and Mrs. Grace had both died, the IRS audited and determined that the trusts were reciprocal and included the amount of Mrs. Grace’s trust back into the estate of Mr. Grace. The case was eventually argued before the US Supreme Court in 1969 on Certiorari from the United States Court of Claims.
Justice Marshall writing for the majority opinion says “we hold that application of the reciprocal trust doctrine requires only that the trustee be interrelated, and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries”. As a result, the Court required that the trust be included in taxpayer’s estate. IRS wins, Grace Loses.
Once you navigate past the ascertainable standard and reciprocal trust traps, make sure you create your SLAT as a fully asset protected trust, a Domestic Asset Protected Trust (DAPT) within the 17 asset protected states as Sessions should have done in Rush Univ Med Center v. Sessions, N.E. 2d , 2012 IL 112906, 2012 WL 4127261 (Ill, Sept. 20, 2012) (Rush U). The facts in Rush are rather simple. Sessions established a DAPT which irrevocably pledged $1.5M to Rush. Rush commenced construction in reliance on the pledge. Sessions however was diagnosed with cancer that he blamed on Rush for failure to diagnose. He wrote Rush out of his Will before he died in effect voiding the $1.5M gift. Rush sued the Sessions estate in Rush v Sessions claiming the estate was liable for the $1.5. Lower Courts grappled with conflicts between the Common law in Equity and the Illinois Fraudulent Transfer Act with the Appeals Court eventually ruling for Sessions. However, the Illinois Supreme Court reversed noting that Sessions created a DAPT for his own benefit and used the “spendthrift clause” to protect the assets from Rush, a legal creditor. Justice Thomas further opined that regardless of state statute supporting Sessions, justice and fairness require that Illinois common law in equity void the “spendthrift clause” of Sessions DAPT and allow Rush to pierce the DAPT and collect their debt. Rush wins, Estate of Sessions loses.
After you set up your SLATs then you need to restructure your assets by creating a family LLC Holding Company to acquire your other LLCs including your business, rental properties and other real estate as well as your primary residences. Please ask your CPA Tax Attorney to assist you in setting up this structure. Stay tuned for the next TaxView with Chris Moss CPA Tax Attorney to hear more on the benefit of having your SLAT own the LLC Holding company and not the assets directly creating the sturdy foundation you need to bulletproof your structure from IRS audit and keeping your assets protected and safe for generations to come. Thank you for joining us on TaxView from Chris Moss CPA Tax Attorney
