Tax Return Filing Requirements The transfer of ownership to the SLAT will cause the need to report the transfer on a gift tax return in the year of the gift. The transfer of assets to a limited-access trust for spouses is a donation and will require the filing of a gift tax return. Because the spouse is a beneficiary of the trust, gifts to a SLAT are generally not eligible for the gift division, where half of the gift is reported by each spouse. Plan to fund the trust with only the amount of your available gift tax exemption or a smaller amount.
Each spouse must file a separate gift tax return, as there is no option to file a joint return. However, the returns are simply to inform the use of gift and estate tax exemptions, and no gift tax should be paid. Key aspects of the GRAT are: funding the trust with assets that are expected to appreciate or provide income that will finance the payment of the annuity to the grantor; (determine the desired annuity payment amount); and (minimize the impact of the gift tax) of the transfer of the rest of the interest to the beneficiaries after the annuity term expires. The grantor selects the GRAT term, but it must be reasonable to provide the best opportunity for the grantor to survive the term and not cause the assets to be returned to the grantor's estate.
In the event that the grantor does not survive the terms of the GRAT, the value includable in the grantor's estate is the amount of the trust necessary to finance the remaining term of the annuity payable to the grantor on the date of death. Another opportunity to consider is the transfer of a family business to a trust to freeze the value of the asset for wealth tax purposes. This allows future growth in value to occur outside the grantor's assets, while the grantor maintains some control over the assets. This technique, like the GRAT, may be especially advantageous at this time, given the low interest rates.
The basic premise of an intentionally defective grantor trust (IDGT) is that the value of the gift is established when assets are transferred to the trust. The grantor will pay tax on the income of the trust, but the appreciation of the asset is not included in the value of the gift and therefore does not use more than the grantor's lifetime exemption. The value freeze occurs when the asset is sold to the trust through a payment note with the aim of transferring income and appreciation above an interest rate favorable to the IDGT. This change only occurs if the actual rate of return on the fiduciary asset exceeds the interest on the payment note.
That's where the low interest rate comes into play. The current long-term rate applicable to a payment note, the applicable federal rate (AFR), is only 1% at the time of writing. This type of sale only works if the company's assets create sufficient liquidity within the trust to make the required annual note payments. The Lifetime Access Trust for Spouses (SLAT) is a special wealth transfer technique that can be particularly attractive when asset values are low.
A SLAT is an irrevocable trust established by one spouse (the donor spouse) for the benefit of the other spouse (the beneficiary spouse). It provides a lifetime interest on the property contributed to the trust to the beneficiary spouse, and the rest of the assets go to the specified beneficiaries of the trust (usually the couple's descendants). Both spouses can establish a SLAT, but, as explained below, care must be taken to ensure that trusts are not treated as reciprocal trusts. SLATs achieve the dual objective of using the lifetime gift exemption for the benefit of descendants while allowing the donor spouse to retain indirect access (through the beneficiary spouse) to the assets donated to the trust.
Most donation techniques require the donor to hand over assets without control or rights to future income, fearing Sec. The SLAT strategy is unique and should be considered for high-net-worth clients who want to minimize their future equity tax liability and yet are concerned about preserving enough value (indirectly) for themselves. In light of the COVID-19 pandemic, many customers find this strategy attractive. It is important to emphasize the need for careful planning and implementation of the SLAT, as well as to convey a clear understanding of the indirect rights that each spouse will have over the other spouse's trust.
The grantor is making an irrevocable gift of the assets contributed to the trust and, to avoid the appearance of a mere reciprocal trust, the grantor cannot expect that the assets will actually be available to him or her after the gift has been made. Upon the death of either spouse, the assets of the trust will pass to the beneficiaries specified by the trust. To avoid the reciprocal trust doctrine, the terms of the trust cannot be identical, and therefore the specific assets contributed, the rights of the spouse, and the identification of the beneficiaries of each trust must be carefully considered, as in the following example. This summary of the SLTs is limited to addressing the scope of specific rights necessary to avoid the doctrine of mutual trust.
It will be crucial to hire an estate planning attorney with experience in these trusts, as well as providing guidance to the grantor and spouse regarding the important mechanisms of these trusts to ensure the best overall tax efficiency of this irrevocable gift. The gift planning strategies discussed above, combined with current interest rates and asset values, provide a unique opportunity to transfer significant wealth more tax-efficiently than at any other time. The extremely favorable circumstances that currently exist for gift planning may not last long, making this the perfect time to help customers consider these planning options. Contributors are members of or are associated with CPAmerica, Inc.
Business Meal Deductions After TCJA's Peculiarities Driven by COVID-19 Tax Relief Don't get lost in the fog of legislative changes, developing tax issues and recently evolving tax planning strategies. Tax Section membership will help you stay current and make your practice more efficient. While you give up all your rights and control over the donated assets, your spouse will have access to the assets donated as a beneficiary of the SLAT. As a result, all income tax elements related to the assets of a SLAT are reported on the spouses' personal income tax return, and a separate return is not required for the SLAT.
This depletes the assets within the spouses' assets (which could be subject to estate taxes upon death) and preserves the assets of the SLAT. The SLAT may also include provisions that allow the Trustee to reimburse the Grantor for income tax paid attributable to the income of the trust, but Rev. The trust spouse may pay income taxes on income earned by the SLAT, thus making a tax-free donation to the remaining SLAT beneficiaries equal to the tax. Gifts in excess of this amount, other than those made to spouses or charities, are subject to 40% federal gift or estate tax.
Assets donated or transferred to the SLAT do not receive an adjustment to the death income tax base of the trust-spouse because they are not included in the taxable estate. While making lifetime gifts requires you to give up all your rights to donated assets, the SLAT provides protection, since your spouse can receive trust distributions as a beneficiary, which you can use for joint support and support as needed. In order for the IRS to accept the donating nature of SLAT assets as if they were outside the taxable estate of the donor spouse, SLAT assets should really be considered as an emergency fund, as it is better not to “break the trust glass” and use the assets and income for the spouse's lifestyle expenses non-donor. Finally, SLATs provide the family with the opportunity to transfer wealth to the next generation, children or grandchildren, in the form of dynasty gifts that, with proper planning, can be free from the generational transfer tax (GST).
This means that if you set up a SLAT for your spouse's benefit, you'll report taxable income and trust deductions on your personal income tax return. Assets and their future revaluation may eventually pass to children, grandchildren or future generations free of wealth taxes. . .
