Having Your (Wedding) Cake and Eating It, Too?
As the years go by, America is slowly raising a generation that knew not Johnny Carson. Fewer now remember when in 1992 the “King of Late-Night Television” broadcast his last episode on The Tonight Show to a viewing audience of over 50,000,000!
Carson wasn’t doing quite so well years before when an attempt to shore up his floundering career involved hosting a daytime gameshow entitled Do You Trust Your Wife. Much smaller audiences tuned in as Johnny gave the category of an upcoming question to a husband-contestant, who then decided whether to try to answer it himself or “trust” his offstage wife to take a shot at it.
Married high-net-worth clients often ask if there is a way they can get property out of their taxable estate, but still benefit from its use. The answer is, “Yes,” but before moving forward the client would be well-advised to watch a few episodes of Carson’s early gameshow.
The concept is a common and time-tested planning device most-often referred to as the Spousal Lifetime Access Trust (SLAT). Its implementation and use will require that the work be done by the client’s legal and tax advisors.
It works like this:
- The married taxpayer sets up an irrevocable grantor trust with his/her intended heirs (usually the kids) as beneficiaries.
- An additional feature is that the taxpayer’s spouse is made a lifetime beneficiary of the trust – that is what makes it a
- So long as the rights and privileges granted to the spousal beneficiary are not too extensive and they end it death, none of the assets still in the trust will be included in the taxable estate of either spouse.
The extent to which the beneficiary spouse can benefit is significant, including:
- The right to withdraw all income generated in the trust each year.
- The right to withdraw each year the greater of $5,000 or 5% of the trust corpus.
- The power of the SLAT trustee to make discretionary distributions to the spousal beneficiary so long as it is for health, education, maintenance, or support (HEMS!). This is pretty open-ended! Most agree that if your trustee can’t justify a distribution for one of these reasons, someone should be appointed who has a better imagination!
- The spousal beneficiary can even be the SLAT trustee who has the power to make the discretionary distributions discussed in #6!
So, the high-net-worth client can now make full use of the current high lifetime exemption (currently $12,920,000) by transferring that amount of property to a SLAT for the other spouse and still maintain access to the benefits of the property gifted (for a brief discussion of the current use of the high exemptions, see the entertaining and finely crafted article at Time, Tide, and TAXES Wait for No One.
Of course, it is only vicarious access because the conduit for enjoyment is the beneficiary spouse. As an acknowledgement to Johnny Carson, we could call it the Do-You-Trust-Your-Spouse Trust, but SLAT is a much more manageable acronym than DYTYST, is it not?
When the Tonight Show was still performed in New York, Johnny liked to joke, “Anytime four people in this city get into a cab without arguing, a bank robbery has just taken place.”
Get in touch with any questions you have concerning this or other advanced planning matters that come up in your CPS casework at tom@cpsadvancedmarkets.com or 706-614-3796.