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Building Flexibility into your Wealth Transfer Plan

By: David R. Foster, JD, AEP, CLU, CHFC, CAP FLMI

“The only constant in life is change.”


Developing a strategy to accomplish your wealth transfer goals is a unique experience. Other forms of financial planning generally involve a known time frame to reach your goals. When you plan for your retirement, you probably have a date in mind. The same may be said for planning for a child’s education, buying a vacation home, or selling a business interest – you most likely have a time frame in mind. But creating an effective strategy for accomplishing your estate planning goals involves a time frame that is unknown (your own death). Creating a plan is important. But it is also important to understand that various factors such as your family dynamics, your wealth transfer goals, federal and state tax laws, etc. will change over time. And you have no way of knowing for certain when your estate plan will be triggered. The more flexibility you can build into your plan, while still accomplishing your goals, the better.

Changes in Transfer Tax Laws

Federal Estate Tax, Gift Tax, and Generation Skipping Tax

In the past two decades there have been over 35 different changes made to the estate tax exemption amount and the tax rate applicable to the estate tax. There have been attempts to repeal the estate tax and a year without an estate tax (2010) that turned into a year with a retroactive estate tax. Since 2001 there have been three major pieces of legislation that impacted federal transfer taxes; the Economic Growth and Tax Relief Reconciliation Act of 2001, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and the 2017 Tax Cuts and Jobs Act. Many of the provisions in the 2017 Tax Act relating to the estate and gift tax are set to expire in 2026 – so we’re not done by any stretch of the imagination.

There have also been multiple attempts to repeal tax laws that provide heirs with a step-up in basis. IRC §2014 provides that when a capital asset is passed on at death, the basis in that asset is increased (or decreased) to the fair market value of the asset at the date of death. This provides a tremendous advantage for the heir who may then sell the asset and recognize little or no capital gains tax. It essentially wipes out all taxable gains on the asset. Should that law be repealed (and one of the presidential candidates has made that part of his tax proposal), families will need to consider and plan for the additional tax their heirs may incur.

What can be achieved by implementing a flexible estate plan?

Many families desire to build an estate plan that minimizes taxes (income, estate, gift, generation skipping taxes). Other common goals include protecting property from potential creditors, assuring their estate ends up in the right hands, avoiding family strife, and avoiding mismanagement of their estate by their heirs. While there are a number of strategies for accomplishing such goals, many require irrevocable decisions be made with very little ability to make modifications should circumstances change. But by implementing strategies that have a level of flexibility you may gain a number of advantages, including but not limited to, the following:

  • Continued use and enjoyment of property
  • Continued access to income
  • The ability to control and manage property
  • The ability to change future recipients of income and property

While there are many different strategies for retaining a level of flexibility, below we will focus on one of the more common tools – the spousal lifetime access trust (SLAT).

Spousal Lifetime Access Trust (SLAT)

In a SLAT, one spouse (the grantor) contributes assets or funds to an irrevocable trust with their spouse named as primary beneficiary (along with their children if any). By making the trust irrevocable the assets will be removed from their estate for estate tax purposes. The transfer may be in the form of a gift in which case the gift tax may apply – but the grantor spouse may utilize a portion of their applicable exclusion amount ($11.58 million in 2020) to avoid paying gift taxes. And here is where the flexibility is built in – the trust will provide that during the life of both spouses the trustee is given authority to distribute money to the non-grantor spouse and the children / heirs for their “health, education, maintenance and support”. The trustee may also have discretion to make additional distributions to any of the beneficiaries they deem necessary. This provide the grantor spouse with indirect access to income through his / her spouse. At the death of the non-grantor spouse the trust may retain the trust principal and continue making distributions to the children, or the trust may distribute the trust principal to the children.

Should the family have no need for the additional income, of if tax laws change such that bringing assets back into their estate is not prudent, the trustee may decide to retain the assets in the trust, allowing them to grow for the benefit of the children.

Note that in order to avoid having income continue to pass on to the non-grantor spouse upon divorce, the trust may include a provision that states the non-grantor spouse will be considered deceased and will be ineligible to be a beneficiary or trustee upon divorce, legal separation, etc.

It may be appropriate to consider having both spouses create separate SLATs, so that each spouse has access to income during their lives. The trusts would need to have sufficient differences between them to avoid something called the reciprocal trust doctrine which is essentially an argument the IRS may use to include the assets in the estate. It is important to seek the counsel of legal advisors who are familiar with this type of planning.

As the Greek philosopher Heraclitus once said, “the only constant in life is change.” Changing family dynamics, changing financial goals, and changing tax laws all create a moving target when trying to establish a wealth transfer plan. This makes it that much more important to work with professional advisors to match your specific goals and concerns with the appropriate strategy and build as much flexibility into your plan as possible.

DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.