Federal estate, gift and GST tax exemptions are currently at historic highs ($11.58 million per individual in 2020). These higher exemptions are scheduled to return to $5 million, adjusted for inflation, after December 31, 2025, but they could be reduced before then as a result of political or policy changes.
Because of this potentially limited window to take advantage of the higher transfer tax exemptions, many individuals are making—or at least considering—large gifts while the exemptions are certain. However, not everyone is ready to give away a significant amount of wealth in case those assets are needed in the future. For those who are concerned they may need to access gifted assets in the future, the following are some strategies that can build flexibility into gift planning to address that concern:
1. Spousal Access
One option that married couples have for flexibility is spousal access to any gift made. This is often in the form of a spousal lifetime access trust (SLAT). A SLAT is a type of irrevocable trust that includes the grantor’s spouse as one of the beneficiaries. The married couple is able to take advantage of the gift tax exemption because the trust is funded during life, but they can also retain access to the trust’s assets through the ability of the grantor’s spouse to receive income and principal distributions. A few considerations when using spousal access include:
• If both spouses wish to create a SLAT to provide each of them access to trust assets, care must be taken that the trusts are not substantially identical. For example, the trusts can be created at different times, funded with different amounts and contain different terms.
• When creating a SLAT, “spouse” can be defined in a variety of ways, including the current spouse only or including the current spouse and any future spouse. For someone who is not married, including a future spouse may allow for spousal access later.
2. Special Power Of Appointment
A special power of appointment is a power granted to an individual (the “powerholder”) to direct trust assets to a specified person or class of people (other than the powerholder, the estate of the powerholder or the creditors of either). This type of power generally allows the powerholder to direct distributions to one or more people, change the beneficiaries of the trust and/or change the terms that apply to the trust as long as the directions are consistent with the power of appointment granted. When including a special power of appointment in a trust document, some important considerations include:
• The permissible appointees of a power of appointment generally can be as broad or narrow as the grantor chooses. The grantor can even be a permissible appointee for outright distributions in many circumstances.
• If the grantor is a permissible appointee, then special care must be taken when choosing the powerholder(s). To avoid any argument that the trust was always intended for the grantor, the trust could require multiple powerholders, or a third party, agree to any distribution.
3. Trust Protector
A trust protector is a person who has powers over the trust but is not the trustee. • Trust protectors are growing in popularity for several reasons, including:
They can address trust issues and solve problems that weren’t—or couldn’t have been—anticipated at creation.
• They often have the power to remove or replace trustees, change beneficiaries, divide the trust, change administrative provisions, or change trust situs.
• In states like Delaware that allow for self-settled asset protection trusts, the grantor can even be part of the class that can be added as a beneficiary of the trust by the Trust Protector.