Tax and Estate Planning With SLATs, GRATs, and IDGTs: Key Drafting Considerations for Counsel

Description

For most taxpayers, estate planning should focus on maintaining assets for a very comfortable life, while passing as much wealth net of taxes as possible to loved ones on a multi-generational basis. However, as interest rates rise, two strategies that have been extremely successful. We will review how GRATs and Sales to IDGTs work, while understanding the countervailing impact of rising interest rates. In any interest rate environment, GRATs and IDGTs are not without risks, including mortality risks that will result in the loss of estate tax benefits if the grantor does not outlive the terms of the trust and potential economic underperformance.

A GRAT allows a grantor to transfer growth assets into the GRAT, while retaining the right to required payments for a term of years. When the trust term ends, the remainder interest generally passes to or for the benefit of the grantor's children. So long as the grantor survives the GRAT term, the amount that passes to the beneficiaries is not subject to estate tax.

Another effective technique for transferring wealth to beneficiaries has been the sale or transfer of assets into an IDGT. The sale of an asset to an IDGT is not considered a gift event that would trigger gift taxes, and the sale is not considered a taxable event that would trigger any capital gains tax. Also, the sale accomplishes the removal of the asset from the taxable estate.

A SLAT is an irrevocable trust created by one spouse for the other's benefit by using the gift tax exemption to make a gift to the SLAT, naming the other spouse as a potential beneficiary, along with children and grandchildren. This allows limited access to the beneficiary spouse to the same assets and offers flexibility in structuring the trusts for client needs if estate planners effectively build in specific powers and options.

Listen as our panel discusses the legal framework and key considerations for irrevocable trusts, the pros and cons of trust protectors, beneficiary control and distribution provisions, retaining settlor flexibility and access, redirecting trust assets, and other key considerations.