With football season and the end of the estate tax exemption fast approaching, I thought it would be a good time to get back to basics. I bring this up because we have less than 16 months before the generous estate tax exemption limits sunset at the end of 2025. Clients who haven’t started their estate planning are running a two-minute drill. When the pressure’s on, and the clock is ticking against you, it’s tempting to seek trust shortcuts and various charitable giving schemes that have been popping up lately to get money out of an estate. Don’t get drawn offside. If the strategies sound too good to be true, they probably are.
Now more than ever, stick with basic, proven strategies. Because if you must unwind a broken trust or hastily assembled gift, it can be significantly more expensive to fix and require some unpleasant huddles with the IRS. Hall of Fame football coach Vince Lombardi once said: “I don’t care about [fancy] formations or new offenses or tricks on defense. If you block and tackle better than the team, you’re going to win.”
Regardless of which party inherits the White House, we don’t know if any of the proposed legislation will pass. Rest assured, exemption limits will most likely be reduced and not raised. If you don’t help your clients take advantage of the historically generous estate tax exemption limit before it changes, you could miss out on a once-in-a-lifetime opportunity. Your clients may never have another chance to get this much money out of their estate free of tax.
Good trust crafters can make plans as flexible as possible. They’re skilled at getting assets out of your clients’ taxable estates through charitable giving while still protecting clients and allowing them to access their assets. However, a well-designed plan doesn’t happen overnight, and every decent estate planner I know is up to their eyeballs at work. Don’t wait until the last minute.
SLATs
A spousal lifetime access trust (SLAT) is one of today’s most popular trust structures. Essentially, a SLAT is a legal arrangement designed to help individuals transfer their assets out of their estate while providing spousal access. When you establish a SLAT for your spouse’s benefit, you can gift assets up to your lifetime gift exemption—currently $12.92 million per individual—without incurring federal estate taxes. Transferring these assets out of your direct ownership enables your spouse and beneficiaries to benefit from future appreciation. As long as the couple remains married, those assets can continue to support their lifestyle, even though they’ve gotten the principal amount of the gift (and future growth) out of their estate
SLATS are fairly new, having emerged half a dozen years ago. Before SLATs came along, we used a similar structure called “defective trusts,” which allowed you to get assets out of your estate. But with defective trusts, there wasn’t a provision for your client’s spouse to access those assets. SLATS are a clever new twist. However, there are some drawbacks to SLATs:
- Lack of flexibility: Gifts to a SLAT are final and can’t be undone. However, we can add provisions that make irrevocable trusts changeable if needed.
- Lack of control: As the gifting spouse, your client must give up direct control over and access to the trust assets. Since they can’t be a trustee, they won’t have any say on whether and when distributions will be made to the beneficiaries. Many couples who consider SLAT planning ultimately decide they aren’t comfortable losing this much control over their assets.
- Divorce risk: If your client gets divorced, they’ll lose indirect access to the SLAT funds they had through their spouse, and the ex-spouse will continue to benefit from the trust.
- Loss of access if the spouse passes: On the non-donor spouse’s death, the donor will lose indirect access to the SLAT.
So, don’t turn your back on basic defective trusts if SLATs aren’t the ideal solution for a client. Also, whether your client transfers cash, business interests or real estate into a SLAT, the assets must be transferred at fair market value determined by a qualified, independent appraiser. As with estate attorneys, appraisers are extremely booked up right now. Don’t skimp here. That could draw a penalty flag from the IRS, which has been scrutinizing large transfers into trusts more stringently and questioning fair market values.
Beware of Pop-up Estate Planning Schemes
With time running out until the estate tax exemption limit sunsets, I imagine we’ll see increasingly hastily assembled trusts and strategies that are, frankly, flaky. It’s amazing what people will do in the interest of potentially saving taxes, but in the process, they miss the basic blocking and tackling.
I’ve seen four or five in the last month that have left me scratching my head. For instance, there’s a yacht brokerage website on which you can supposedly use your yacht (or jet), get a tax write-off, and then give your yacht or jet to charity. It claims to be IRS-sanctioned, and it eliminates the hobby-loss rules. The seven-page letter on the website is full of legalese and marketing jargon without saying anything, and they tell charities they have valuable property to give them. Again, if it sounds too good to be true ... you know the rest.
Meanwhile, I’ve heard about a group selling mineral rights that claims you can earn a tax deduction worth eight times your original investment (that is, a $400,000 income tax deduction for a $50,000 investment). That’s because it has a convoluted charitable gift attached to it. Theoretically, you’re buying the minerals at the low cost of getting them out of the ground and gifting them at their marked-up retail price. There’s no economic reason for doing this kind of transaction except to save taxes—and the government doesn’t like anything you do just for tax reasons. And when you look through the attorney opinions attached to these mineral right charitable schemes, they’re often written by law firms that don’t exist or by personal injury attorneys with no estate planning credentials. Sounds like a penalty flag for “illegal procedure” to me.
Finally, a well-known attorney tells high-net-worth individuals that they can put appreciated assets into a special kind of trust before selling them. He claims the trust allows them to defer the gain on sale because it uses the installment sale rules to keep them from receiving the funds. But you can never make money when you look through the promoter’s fees and money management costs. Flag!
These are the kinds of questionable schemes that could be gaining more traction with HNW individuals and their advisors, with the clock ticking against them. So, it makes me wonder, why don’t you just do basic blocking and tackling?
Randy A. Fox, CFP, AEP is the founder of Two Hawks Family Office Services. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.
