Federal estate, gift and generation-skipping transfer tax exemptions are currently at historic highs ($11.58 million per individual in 2020). But these exemptions are scheduled to revert to $5 million, adjusted for inflation, after December 31, 2025. What’s more, they could be reduced before then because of political or policy changes.
Because the window for higher exemptions could close, many individuals are making—or at least considering—large gifts while it’s open. But not everyone is ready to give away a significant amount of wealth, because they might need access to those assets later.
For those concerned about this, there are some strategies that can build flexibility into their gift planning.
1. Spousal Access
One option 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 the grantor’s life, but they can also retain access to the trust’s assets because the spouse can receive income and principal distributions.
There are a few considerations when thinking about spousal access:
• If both spouses wish to create SLATs that offer each other access to trust assets, they must take care 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 clients are creating a SLAT, the term “spouse” can be defined in a variety of ways. It may refer only to the grantor’s current spouse or may also include someone the grantor is married to in the future. Even if the person is not married, he or she can include a future husband or wife that gets access later.
2. Special Power Of Appointment
A special power of appointment is a power granted to an individual (the “power holder”) to direct trust assets to a specified person or class of people (other than the power holders themselves, the estate of the power holders or the creditors of either). This generally allows the power holder to direct distributions to one or more people, change the beneficiaries of the trust 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, there are some important considerations:
• 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 power holder(s). To avoid any argument that the trust was always intended for the grantor, the trust could require multiple power holders, or a third party, to 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:
• 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 (where it is administered).
• 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.