Introducing the D-SLAT

A Better Way to Make the Most of Your Gift, GST & Estate Tax Exemptions Before the Sunset in 2026

Irrevocable trusts are the path to using your gift, generation-skipping, and estate tax exemptions, saving taxes, and protecting assets in the current legislative environment.?

Use Exemption Now: The current estate, gift and generation skipping transfer tax (GST) exemptions are a generous $13,610,000, and are scheduled to automatically revert to about $7,000,000 on 1/1/2026. ?This means you can gift during your life and bequeath at death up to $13,610,000 to anyone, including grandchildren, without any transfer tax consequences.? Transfers in excess of this amount are currently taxed at 40% (and even more for transfers to grandchildren).? If your lifetime gifts plus your current net worth is at least $7,000,000 it is imperative that you consider using your exemption amount prior to 2026, for several reasons:

·??????Future tax law is uncertain.? If you act now, you can shelter transfers to anyone up to the $13,610,000 exemption amount from transfer tax;

·??????Setting up an irrevocable trust now should provide some future asset protection for your family;

·????? All appreciation on the assets gifted to an irrevocable trust will be removed from your taxable estate, escaping future estate tax;

·??? An irrevocable trust is the only reliable way to use your exemption amount and still preserve assets for multiple generations.?

?Or Not to Use Exemption Now:? Many families are struggling with the idea of using or losing the exemption amount. Afterall, a gift is irrevocable, and for people in this echelon of wealth, charities are often bigger beneficiaries than family members.? Some do not care about losing the higher exemption, as between vast amounts of life insurance and other lifetime gifting, there is already arguably “too much” wealth going to heirs.

How to Use Exemption: If you are going to take advantage of this unprecedented opportunity to transfer up to $13,610,000 to your heirs or others without any transfer taxes, what type of irrevocable trust might make sense for you?

·??????One of the biggest challenges of the current environment is that most people only part with assets of this magnitude at death.? Making use of the present exemption amount requires the making of an irrevocable gift. ?With creative and expert planning, you may be able to make that irrevocable gift, while still retaining some access to the assets transferred to an irrevocable trust.

·??????If you are married, you can set up an irrevocable trust for the primary benefit of your spouse during his or her life (and then at your spouse’s death to your heirs). That way your spouse (and indirectly you) can access assets transferred as a beneficiary. This type of irrevocable trust is commonly called a Spousal Lifetime Access Trust or “SLAT.”

·??????If you are single, you can consider a SLAT that could benefit a future spouse, or a self-settled trust for your potential benefit, commonly called a domestic asset protection trust, or DAPT.? In Michigan, a DAPT is irrevocable, however, you may be a beneficiary of the trust and retain some of the management duties over those assets. Further, you may retain the power to direct investment decisions, veto distributions from the trust, receive income as a trust beneficiary, receive discretionary distributions of the income and/or principal (subject to the trustee’s discretion – not your discretion), remove and appoint a trustee, and direct how trust assets will be distributed after your death (i.e., direct the trustee to pay debts, expenses of administering the estate, or payment of any estate or inheritance tax).?

·????? A DAPT is the riskier of the two options between a SLAT and a DAPT from a transfer tax planning standpoint.? With careful planning, some practitioners advise it is possible to structure a DAPT to escape inclusion of the trust assets in your taxable estate at your death, thereby protecting the use of your exemption amount.? Because of the inherent estate tax inclusion risks of a DAPT, given that the settlor is also a potential beneficiary, most practitioners are focusing on optimizing the safer SLAT structure for clients.? Even for a single person, a SLAT may still make sense as a spouse can be defined in the trust agreement as any person the settlor is married to now or in the future.

The Better Use of Exemption:? Enter the Dynasty SLAT, or D-SLAT.? To leverage the generation-skipping possibilities of current tax law, most very wealthy people are parking all $13,610,000 of their exemption in an irrevocable trust that is designed to carry-on for unending generations (if state law permits) with discretionary distributions for the health, education, maintenance, and support of their spouse and then multiple generations of family members.? If married (and there is no better time to be married for a wealthy person) each spouse establishes his or her own trust, thereby moving up to an unprecedented $27,220,000 to generations of family heirs with no transfer tax cost.? ?

SLAT Considerations: The following topics are a good starting point for a lively discussion with your attorney on how to structure your SLAT.

1.???? Cash-flow and Asset Performance Projections: Trying to avoid transferring assets to the SLAT that will likely be needed to support your lifestyle is critical.

2.???? Trust Situs: What state will have jurisdiction over your trust? Most people assume it should be the state where they live. You can generally set up your trust out-of-state to potentially avail the trust of more favorable tax and privacy laws. For example, in Delaware, under the administration of a Delaware trustee, there is more secrecy afforded the settlor, in that trust beneficiaries are not entitled to certain information about the trust. ?Most practitioners try to avoid establishing and administering discretionary trusts in states like California and New York due to onerous income taxation state statutes.

3.???? Income Tax Treatment: Because the trust will generally take a carryover basis in gifted assets, gifting high basis assets is advisable.? Generally, during your life your SLAT will be characterized for income tax purposes as a grantor trust. A spouse’s income interest can cause a trust to be taxed as a grantor trust, and other powers that provide future planning opportunities (like a power for the settlor to swap assets or borrow from the trust without adequate security) can also cause this grantor tax treatment.? That means you will pay the income taxes on the trust income personally. Having a swap power will allow you to switch out low basis assets for higher basis assets to mitigate the loss of basis step up at death.? While perhaps a drag on cash-flow, the IRS has acknowledged that the payment of a trust’s income taxes by a settlor with grantor trust type powers is essentially a tax-free gift to the trust.?

4.???? Income Tax: By including a discretionary income tax reimbursement clause in your SLAT agreement, the trustee of your SLAT, in the trustee’s discretion, may reimburse you for income tax you pay on trust income, adding valuable flexibility and giving you some comfort that the tax burden won’t become too much to handle.? Your SLAT may also be structured to “turn-off” the grantor trust status at a future date.

5.???? Powers of Appointment: A power of appointment in the trust agreement can allow a family member to direct who among a class of persons may receive the rest of the trust assets, usually at that family member’s death.? Often a “general” power of appointment (broad ability to appoint to anyone including the power holder) will be included in a dynasty trust or D-SLAT to avoid the possibility of a future generation-skipping transfer tax.? Further, a “limited” power of appointment (limited ability to appoint to a class of person like descendants and charities) can provide more flexibility for a trusted spouse or children to make their own informed decisions about how the trust assets should ultimately be retained in further trust or distributed.?

6.???? Loans: The option of having the trust to loan you money is one way to retain access to the trust assets.? Your ability to borrow money should be spelled out in the trust agreement.

7.???? ?The Power to Add a Charitable Beneficiary: The mere existence of this power (typically held by a non-adverse party to the trust) may characterize the trust as a grantor trust for income tax purposes during the settlor’s life. In fact, historically that is why this power was used.? By adding a charity, the family may be able to accomplish charitable purposes and also reduce the overall family income tax burden on trust assets.

8.???? Vacation Home: Your SLAT could be a good option for owning an interest in a vacation home that is intended to stay in the family. And if your spouse uses the vacation home, you can as well without having to pay rent to the SLAT.

9.???? Entity Planning: It may make sense to “wrap” or contribute your assets to an entity like a family partnership that you have some control over before transferring those assets into a SLAT.? This might allow you to continue to control or manage the assets gifted and take a management fee. This also may allow you to utilize gift tax valuation discounts to reduce the amount of exemption used on the gift.

10. Estate Inclusion:?Should estate inclusion of the SLAT assets in your estate become advisable after all, to get a step up in income tax basis or if estate tax is eliminated, your SLAT could give an independent person a power of appointment to force any or all trust assets back into your taxable estate. Doesn’t that defeat the point of the SLAT? Yes, but it is an eject button for unforeseen circumstances.

11. Life Insurance: Your attorney can incorporate life insurance provisions into your SLAT agreement. That can avoid the need for yet another trust to simplify planning. If you make a large gift to the SLAT to use exemption, then the SLAT can also own the life insurance and pay premiums.

12. Remote Contingent Beneficiaries: Confirm with your attorney who should receive the trust assts in the unlikely event that your spouse and all descendants die. ?Many attorneys’ documents provide as a default, that on the death of the last of you, your spouse, and descendants, assets pass to heirs at law. You might prefer instead to name specific people or charities. A D-SLAT is a very long-term trust so giving some thought to these remote beneficiaries is important.

13. Reciprocal Trust Doctrine: The reciprocal trust doctrine should be avoided if you create a trust for your spouse and your spouse creates a trust for you. The reciprocal trust doctrine poses the risk that if the two trust agreements' provisions are too similar (which is subjective) that the IRS or creditors could “uncross” the trusts so the trusts will be treated as if you created a trust for yourself and your spouse created a trust for herself.

14. Annual Withdrawal Rights: Trust beneficiaries can be given the right to withdraw for a short period of time contributions to the trust up to the annual exclusion amount (presently $18,000) to qualify the gifts to the trust for the gift tax annual exclusion for each beneficiary.

15. Gift Tax Return: You (and your spouse) will have to file a United States Gift Tax Return (Form 709) reporting the gifts to your SLAT. It is important that your gifts are adequately disclosed pursuant to IRS guidance to trigger the three-year statute of limitations.

16. Spousal Rights: A spousal waiver or community property related paperwork may be warranted prior to gifting assets to your SLAT.? Talk to your attorney about how to craft the spousal income and principal distribution provisions to protect your trust against divorce and family disputes.

17. Beneficiary Distributions:? Get creative!? What should trust assets be used for?? A residence? a business?? Should trust distributions be based on income or a percentage or trust assets?? Should distributions be liberal or restricted?? Which beneficiary has priority? Should the trust be a single pot trust, or divided into separate trusts?? Your trust will need special provisions for beneficiaries who are minors or with special needs, and can provide trustee guidance on what constitutes an appropriate distribution under any number of beneficiary circumstances.

18. Fiduciaries:? Who should be entrusted with administering your SLAT?? Your spouse could start out as the initial Trustee, but a long line-up of named successors, and provisions regarding qualifications and a process for replacing trustees is extremely important.? A D-SLAT is a complex instrument that will be in place a very long time requiring serious consideration of a professional trustee who is a trust company, or a tax or legal advisor.? Allowing for beneficiaries to serve as Trustee provides other assurance there will always be a willing and eligible trustee candidate.? Modern trust agreements also often provide for other roles, including trust protectors (with powers to amend the trust agreement for future law changes, change to accomplish trust purposes, or to correct ambiguities, among other things), investment advisors, distribution trustees, and special asset (like a family business) trustees.

19. Statement of Trust Purpose:? It is so helpful, especially once you are gone, to set forth the basic purposes of the trust.? Courts and trustees often look to the settlor’s probable intent when making determinations about the fate of a trust.? Knowing what you had in mind when you set the trust up goes a long way toward fulfilling your intent.

20. Existing Trusts.? Do you already have one or more trusts in place that are “old and cold”? Consider the opportunity you may have under state law or the trust agreement to merge, decant, or consolidate trust assets into a new more modern trust agreement.? Trust attorneys are now able to be much more creative, and trust law is now much more flexible rendering old trust agreements obsolete in many cases. Getting a court order to modify and then merge a trust into a new one may not be a big deal, depending on the agreement, court jurisdiction, and beneficiary dynamics.

21. Special Assets:? Do you have a family business or real estate that requires special management or operation? You can provide guidance on how those assets should be handled and whether the prudent investor rule that generally applies to trust investments can be waived.? You can designate a committee or advisor to handle any special assets that a trustee may not be most capable of handling.? You can provide trustee direction on what is a suitable investment and exclude certain investments like options or crypto currencies.

22. Assignment of Assets: After your SLAT is formed, your attorney should assist with trust funding to make sure assets are transferred and titled appropriately.? It makes sense to assign in writing the gifted assets as of a given day to establish the transfer date.

23. Fiduciary Accountings:? An irrevocable trust once funded should generally have an annual fiduciary accounting prepared by the trustee or legal counsel to track trust activity throughout the year and report as required under the trust agreement (or state law) to the trust beneficiaries. In Michigan, the settlor has some latitude as to who receives accountings, subject to potential oversight from state probate court at the request of a beneficiary.? In most cases state law and/or the trust agreement will allow a beneficiary to waive an annual accounting, and if a beneficiary is receiving all monthly bank account statements for all assets, an annual accounting waiver may be practical.

Final Thoughts.? Lots to think about.? If your net worth is in excess of $7,000,000, talk to your attorney about a D-SLAT to use and leverage your remaining exemption amount.? It is worth your time and attention as this opportunity is scheduled to close as of 1/1/2026.? Even if your net worth is below this threshold, consider talking with your attorney about how your family can utilize irrevocable trusts to accomplish your non-tax goals and objectives. Modern trust law allows for a complex document that is flexible in terms of fiduciary selection, investments, beneficiary distributions, taxation, settlor’s access to assets, and trust administration.

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By: Elyse W. Germack, Attorney and CPA Schluter & Hughes Law Firm, PLLC

This is informational and educational only and does not constitute legal or tax advice. Please consult your own professional advisors before taking any action.? This information will not be updated for law changes.?

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