The WAY to WOW Shows
Advanced Estate Planning - SLATs
October 7, 2024
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[0:03] hello and welcome to trust and Estates weekly I'm your host Kevin bemel and we're here every Monday at 10: a.m Pacific time and we talk about all things related to trust and estate and probate both from the planning side and the administration side so whether you're someone looking for information about your own situation or you're a professional like like guest and me um this this is the show for you so today I'm very pleased to welcome Jacqueline youu onto the show uh Jacqueline and I

[0:40] met I think almost a year ago now and um she has such a busy schedule that um I wasn't able to book her until now um but really excited to have her on the show um she has very very deep as well as broad knowledge in this subject and uh so without you know a lot of uh of Ado because I'll I'll have um I want to have Jacqueline speak first of all thank you so much for coming on the show today Jacqueline thanks for having me thank you Kevin you're welcome so start out if you would just give us a little bit

[1:15] about your background so people can understand uh you know the work that you do and and your level of of expertise and experience sure so I run my own practice the law offices of jacn du and I have offices in um Beverly Hills and Calabasas I've been practicing for over 16 years now purely in Estate Planning and Trust administrations I also have a masters of Law and tax from UCLA so go Bruins um jur doctorate from Notre Dame law school

[1:51] so I am a definitely a um hopefully not an enemy of Trojans so hopefully none of your listeners are um USC alumni but um I digress so so just just you know full disclosure I am a USC graduate one of my longest standing friends was was a USC grad but a professor at UCLA for 30 years so so you know we we work both sides of the of the Town well you're very gracious for inviting me regardless of being a Trojan

[2:26] so thank you well done so um you know being that your practice is is Beverly Hills based and Beverly Hills and calabas is based um to you know candidly of the most affluent communities right here in the Greater Los Angeles area I I imagine you encounter complex planning and administration situations quite often and in preparation for the show you mentioned you wanted to talk about a

[3:01] couple of them something called a slat and an init and and so I'm going to sort of take a step back and and kind of let you set this the this the stage for these and talk about how they work and how they can help people um you know with with who have more complex undoubtedly larger Estates and and you know more so we will expect to have people um crossing over the exemption threshold come December 31st 2025 right when the exemption will be

[3:38] significantly reduced by half so there will be more people who will be in need of these Advanced estate planning strategies so it's really important that we do discuss this because it will be hopefully helpful to a lot of your um viewers and listeners and um a lot of people in general um especially living in California where it's quite easily be able to cross over that exemption threshold um I'm sorry I'm gonna interject here just real quickly for for folks who don't know what what we're talking about right now the exemption from estate taxes is approximately $13

[4:16] million correct and if it's a married couple it'll actually be double that however um assuming that the law um the uh 2017 uh tax law um expires as planned at the end of 2025 that exemption is going to be cut I've heard various estimates of what it's going to end up being but somewhere to around maybe about six million right so again for an individual about six to S million for a married couple maybe 12

[4:53] to 14 but still that's a huge reduction and is likely to um uh catch a lot more people especially here in in the coastal parts of Southern California than than than the current law so that's absolutely correct so under the 2017 tax cuts and jobs act um we currently have the highest exemption in history which is 13.61% 22 million per married couple but

[5:28] this is scheduled to Sunset by statutes so it's already written into law December 31st 2025 to roughly six or 7 million per person so that's about 12 to 14 million as you mentioned per married couple December 31st 2025 so we're looking at two different um uh Playing Fields one that we currently have now and one that will happen at the end of next year right so what do we do the general rule is to try to have an estate plan that is flexible

[6:05] that we can use depending on these change uh circumstances and changes in the tax laws um and so what I have been helping my clients with from now until end of next year especially those who are close to the threshold under the current tax exemption estate tax exemption and who will will be most certainly after the end of next year and how to maximize on their current exemption amount um fortunately the IRS has issued regulations that make it very

[6:43] clear that if you maximize on your current estate and gift tax exemption today which is 13.6 million and it goes down to six or seven million at the end of 2025 they won't go back and try to assess the amount that you gifted in excess of that exemption by the end of next year so we call this a anti- clawback regulation and that's already set so that's kind of our Safe Harbor so we have the go signal the green light to say okay great we have this exemption within this window period let's use it if we know we're going to have a taxable

[7:20] estate okay and so with that said we have that Safe Harbor I want to talk about the really the two main um trust strategies that I've been using and a lot of other Advanced estate planners have been using particularly in California to be able to maximize on the higher exemption amount the first is the spousal lifetime access trust and the second is the intentionally defective gror trust unlike in other states where you could set up what we call a self-settle trust like Nevada or Delaware um where

[7:57] you as The Grand Tour sets up a trust and you could be one of the beneficiaries and that still provides asset protection um and it also excludes the assets you've transferred from estate inclusion here in California we don't have the benefit of utilizing the asset protection feature of self-settled trusts what we often use instead um and this goes for married couples is the spousal lifetime access trust so if you to a certain extent if you want to have

[8:32] your cake and eat it too where you want you want to maximize in your exemption put it into an irrevocable trust to reduce your taxable state but you may want to still benefit from some of the assets you've gifted away we use the spousal lifetime access trusts and it's an indirect benefit it doesn't mean that you are uh legally entitled to um the assets in that trust you've given given away but by virtue of still staying married so it's important that you still stay married you can indirectly benefit from the assets you've gifted uh to this

[9:10] irrevocable trust for the benefit of your spouse whom we call the beneficiary spouse so um if you are married you are the grandor spouse you're the one who's setting up this trust you can set up an irrevocable trust for the benefit of your spouse your spouse being the beneficiary of that trust and it could be for his or her lifetime and upon his or her death upon the beneficiary spouse's death it gets distributed out to generally um the children or more remote descendants into often what we structure as Dynasty trusts which I'll go over a little bit

[9:47] later as well but in California there's no such thing as a pure Dynasty trust because we have a thing called the rule against perpetuities here in California and technically speaking the trust will ter um within 90 years from the death of the benefici the last beneficiary who was alive when you created the trust so it's not a complete Perpetual trust that you may benefit from and say Delaware Nevada but at least it's a pretty long time they could keep this trust so that is kind of the big picture

[10:22] of of spouse a lifetime access trust we call them slats for for short um and here's some of the requirements the requirements for setting up a spousal lifetime access trust number one whatever you transfer into that trust must be your separate property so we would have to transmute or change the character of that property from Community to separate property before fund funding those assets into a spouse a lifetime access trust the reason for that is because because your spouse is the beneficiary of that trust you don't

[11:00] want to have your spouse having an interest or ownership of that asset you've gifted away otherwise we're risking inclusion of the assets you've gifted Into The beneficiary's spouse's estate right right so it defeats the entire purpose of trying to exclude these assets not just from The gror spouse's estate but also the beneficiary spouses estate so number one we want to make sure the assets transferred to to the slot is The gror spouse's separate property I'm gonna interject a question

[11:35] here real quickly so it sounds like the slat unlike a typical trust that a married couple might set up an an inter Vios trust which usually is um revocable at least until um you know the death of of one of the spouses so it sounds like the slat is irrevocable from from the get-go of the trust right and so that way it creates in essence a separate estate from both of the spouses correct and it's it's a separate trust it has a separate taxpayer ID it files a separate tax return but so long

[12:12] as the grantor spouse is alive it doesn't necessarily need to to um pay its own income tax the slat because it's a gror trust so what that means is any income earned by the assets transferred to the slat will flow through to The gror spouse's individual tax return oh okay so that that so it would would it file essentially an informational return not unlike an LLC or something like that well it depends on the CPA you work with but my general practice is yes you would file a

[12:48] separate return even though it's not reporting any income and IT issues a K1 from the trust return which is a form 1041 California 541 IT issues a K1 to the gror spouse and all the income of the trust is reported on The gror spouse's individual 1040 and and cleaner way that's the cleaner way of doing it yeah yeah and that makes sense um and can the grantor also be the trustee or is okay because it's irrevocable right or because it's revocable sorry because it's irrevocable he can't be right right need you'd have to have a third party trustee a third

[13:25] party trustee so one of the other the second requirement is is the gror spouse cannot be the trustee of that trust otherwise it will be whatever you've gifted into this trust will be included back into the grantor spouse's estate because they have the full power to manage the trust so we want to keep it completely out of the grantor spouse as EST state in order to do that we need to have an independent third-party trustee to be able to exercise what we call the discretionary distribution powers of the trust so that means the power to make distributions Beyond

[14:02] health education maintenance and support which under IRS terms that's what we call an ascertainable standard so the power to terminate the power to distribute a significant portion of the trust the power to to uh change the cus of administration of the trust the power to even amend on limited circumstances the trust it needs to be held by a third-party independent trustee MH who would qualify as a third party independent trustee and under um IRS code section 672c that independent trustee cannot be

[14:40] any of these people in the following categories the gror the gror spouse the grantor's children the gror siblings parents employee or agent so as long as they don't fall under any of these categories then they would qualify if as an independent third party trustee having said that the beneficiary spouse can also be a co-trustee they can serve alongside the independent third party trustee but the beneficiary spouse is limited in the powers he or she may exercise and that

[15:17] would be the power to distribute only for an ascertainable standard which would be health education maintenance and support so for instance if the beneficiary spouse needs some funds to pay her medical bills M then she can he or she can exercise that power without having an independent trustee to to make that distribution okay now if the independ I I I assume the independent trustee can confer with the gr tour but at the same time if the independent trustee seems to

[15:53] be always doing what the grant tour wants it would seem like there's a danger right would you talk a little bit about that aspect of it so people can can get a feel for that because I know in in in I often talk about how for example you know when when I'm when I'm appointed as the trustee or the administrator or state I'll I'll you know talk to the beneficiaries even though they can't dictate to me I still want to talk to them to understand you know what their perspective is as part of my overall decisionmaking process so in this case

[16:28] we have the grantor who's alive presumably the trust is being administrated in accordance with that that grantor's wishes to a certain extent so what are kind of the guidelines there and those are wishes right so it's precatory it's not mandated um and we can you know say in the trust of the grand tor's wish that the you know the assets of this trust would be uh for the purposes of providing for the gror spouse and um and to provide for his or her needs and it goes to under the terms of the trust it

[17:03] goes to the children more remote descendants um or that s grantors wish that um that other resources outside of the trust first be taken into consideration before the independent third party trustee makes discretionary distributions Beyond health education maintenance and support but again it's precatory so the the big takeaway here is that the gror spouse cannot dictate to the trust independent trustee or the beneficiary spouse Who's acting as a co- trustee what to do with those trust assets you can spell out certain

[17:40] guidelines in the trust but that's it um where and ultimately as you know with with a trustee their fiduciary duties lie with the beneficiaries and so the trustee can ask what um the needs are and and um ask what the concerns are from the beneficiary spouse and if upon the beneficiary spouse's death then the children who will ultimately become the remainder beneficiaries but the biggest thing is yes the gror spouse cannot tell and dictate what the trustee can or cannot

[18:15] do because they have the discretionary Powers otherwise it will risk bringing back into the grantor's estate the assets that he or she is gifted away makes sense and um okay I'm sorry why don't you go ahead I'm gonna Reserve that question because you may you may be planning to answer it down the road sure and and the other thing to consider um or not consider but a requirement for slat to avoid the inclusion of these assets you've transferred over in not just the grantor spouse as estate but also the beneficiary spouse as EST state is to

[18:52] avoid or to make sure you draft the trust agreement if let's say each spouse created a trust for the other SP a lifetime access trust for each other that you do not um fall into the reciprocal trust Doctrine and what that means is you can't have the terms of each trust exactly mirror each other oh okay uhuh otherwise the IRS will say this is a whole sham I mean basically you're just creating a trust for each other so that you can still access the funds that you've transferred to your spouse right they're exactly the same so one of the ways to um to avoid the the

[19:29] application of the reciprocal trust Doctrine is maybe creating the slat for each other in different times but you perhaps you if but if that's not possible because you're rushing to meet the deadline before end of next year okay fine you create them you know close in time but you make sure that the terms of distribution are different maybe you want to give one beneficiary spouse a limited power of appointment to U maybe a determine which of the children which of the descendants receive the assets when he or she

[20:05] passes and then on the other trust there's no limited power of appointment those are now two different trust terms um or um perhaps give a different type of distribution um where one trust is purely discretionary with no ascertainable standard so that would mean the beneficiary spouse cannot act as co-trustee but on the other trust Maybe you want to give an attainable standard but in that case it's more uneven that way where one spouse can act as co-trustee the other trust that beneficiary spouse cannot act as a CO

[20:40] truste and would you be well advised to also have different uh independent trustees or or would that not matter um in terms of who would you one would one should consider as an independent trustee or your the third party trustee should should those be different if if there's sort of mutual slats or would that not matter it wouldn't matter it wouldn't matter um because an independent third party trustee has his own fiduciary duties and

[21:15] it's going to be different under each trust right because it's a different beneficiary spouse under each trust so that wouldn't matter and it also saves administrative cost of having two different professional fiduciaries for instance or a family member who's outside of that 672c limitation um so it does make it a little bit easier to use the same independent third party trustee and um so this this is and you I think you partially answered this question but um oftentimes I I assume the the sort of final beneficiary or the

[21:51] remainder beneficiary of the slat is going to be the couple's children um what happens if the children are minors at the time they you know the the um the parents die and that's that's a good segue into um well limited Dynasty trust I as I would say under California law um but it you know or we would call it GST trusts where um the the beauty of a slat that would form into a GST trust is now the

[22:26] assets continue to be transferred tax estate and gift tax free not just during this The spouse's lifetime but once it goes to the children and then to the grandchildren and then the great-grandchildren it is also free from estate and gift tax and it's also free from generation skipping transfer tax um and so the generation skipping transfer tax just if if anyone listening is not familiar with it um there's an additional layer of transfer tax when there is a transfer to a beneficiary who is um at least two generations below the

[23:02] grantor spouse in this case or 37 a half years younger and so what you can do is when you fund when you initially fund the spouse a lifetime access trust you not only allocate your higher estate and gift tax exemption you can also allocate an equal um amount of generation skipping transfer tax exemption so each person has has the same amount

[23:57] 13.61% it will go straight to the children and it can go outright free of trust or stay in these GST Dynasty trusts for The Descendants and as long as the children um are limited in their access to the trust so we can limit it by an ascertainable standard like health education maintenance and support it's also outside of their Estates gotcha now um and and I know we were going to talk about the init but we're going to come up our time so we we'll have to reschedule you I think to talk about that because I have another

[24:33] question about the slacks and that is let's take a a a very high net worth couple who's let's say you know um their combined wealth is maybe five times the current exemption so they're you know they have a net worth of maybe $70 million right so even if they they have their own exemption they set up a slat for each other that won't prevent part of their wealth right from from being subject to aate tax so right could they set up multiple

[25:09] slots uh no so once you have um maximize on your exemption let's say they've maximized their 13.6 million for one slot now they no longer have any other exemption left to use um well perhaps they can create create a trust but in that case we're not going to be us using the exemption anymore they can create a a different kind of trust for the benefit of the beneficiary spouse but in that case when we transfer the Assets in instead of um filing a gift tax return

[25:46] because then it would be a taxable transfer right we construct her a sale oh okay so it would then we would create well we we're going to talk about idgits but it's here's a good time can create an intentionally defective gror trust where we could name the beneficiary one of the beneficiaries or the sole beneficiary the spouse but in this case because we don't have any exemption to use anymore for the gifting we can transfer the additional assets by structuring a sale assuming that there's enough cash

[26:21] to see first seed fund that isit before the the sale is structured and the sale could be structured on an installment note so um it would be a way to pay off that note through assuming that the assets that were transferred is income producing um that there would be enough to service that note and and so the um they would end up paying either capital gains taxes or or um uh regular ordinary income taxes yeah on

[26:58] on on the proceeds of that sale but if it's an installment sale that could be overtime well the beauty of an intentionally defective grantor trust and thanks for that segue is that selling to an idit it will not trigger a capital gains tax because an idit just to shorten the the definition of an idit it is a complete transfer for a estate tax purposes so it's a completed gift but for income tax purposes you the GR or spouse Remains the one responsible for paying the income tax so essentially

[27:34] if you sell to an ID you're basically selling to yourself and if you're selling to yourself it will not trigger a capital gain wow wow very very very clever very clever but those are kind of some of the other strategies we can consider especially if you have a married couple who uh uh exceedingly exceeds the exemption and there's going there's going to be a taxable estate even after you've whittel down their estate value and and um just trying to think I guess it wouldn't necessarily make sense

[28:11] to do multiple idgits because you're not taking advantage of a of a gift tax exemption at that point you're right and it could be the case that you may create an idgit for the spouse and then when the spouse dies it goes to the beneficiaries like the the children the remainder beneficiaries you can also set up a a direct gift trust and another idit just for the children and if you have a business interest by setting up different trusts you can take advantage of um fractional discounts and so instead of using the in

[28:47] um well if you regardless if it's a sale or a gift the benefit of using fractional discounts lack of marketability lack of control discounts is the value of the asset that's being transferred will be reduced so for gift purposes you're preserving more of your exemption on the sale side of it because there are different beneficiaries and the different trusts you've created then the fair market value that will be purchased by the trusts will be discounted gotcha and

[29:22] so let's one other aspect I I I I would would like you to address is once you start having multiple trusts you you know that will create a situation where you have you know costs of administration you mentioned it just briefly a little while ago what what can people expect in terms of cost of administration for you know these various types of trusts that's a very good question and and you you have to balance it out of how much administrative cost s and maintenance do

[29:59] you want to um deal with versus the estate tax savings that a 40% above the exemption that you're saving right so the administrative costs to consider one having a third party independent trustee for these trusts so unless the trustee is willing to wave great if it's a trusted good family member who's kind enough to serve then great but you know they're they're not going to live forever so who's going to take over over after that family member um passes away or can no longer act uh there's also the

[30:34] filing of tax returns for each of these trusts so for each trust you're going to have to file 1041 which is the federal fiduciary return the California 541 the state fiduciary return you're G the trustee will need to have an accounting um for the beneficiaries so at least annually so these are the administrative costs that you will have to take into consider consideration when setting up these trusts because you no longer own it it's by it's owned by a separate trust a separate taxpayer ID it will have its own maintenance costs right so

[31:09] if it were let's say it were real estate so if you had a property management company anyway now the trust would bear that cost rather than you bearing it so that wouldn't really change but it would be the sort of more top level administrative costs that's correct that's correct and and you also have have to consider and make sure you work with the other advisers of of the grandor um spouse or the the married couple like their CPA and their financial advisor because as an estate planning lawyer I can only see what

[31:45] information the clients have given me but I need to work very closely with their CPA their financial adviser to see the overall picture their financial makeup the cash flow that's um that's entwined with the assets that we're transferring into these trusts because if that asset is not going to generate sufficient cash flow we're in trouble right right why because when the grantor dies it becomes a non-grantor trust now the trust is responsible for paying the income or if it goes down to the beneficiaries they're going to be responsible for the income we want to make sure if it's at the trust level

[32:20] there's enough income generated to pay for those taxes and those administrative costs right right and assuming staying with the real estate just for a minute um let's say there are multiple um pieces of real estate put in the slat so um the slat basically how does that work from a liability standpoint let's say you know there's a slip and fall in one of the buildings does that put all the assets at risk um or you know will it just be um you know um I I mean will put

[32:58] all the Assets in the trust at risk or could that possibly spill over into other assets that are owned by um the grantor outside of the trust how how does how does that work sure so by transferring your asset into an irrevocable trust and without having retaining any interest in those assets um after it's been transferred then it is a a creditor protection right so if there's a slip and fall in those in that real property that's now owned by an irrevocable trust they can only reach

[33:33] the assets that are in that irrevocable trust they can't go after the grantor spouse's personal assets their family home and so forth but even further if you have that real property in an LLC or a family limited partnership then there's this an added layer of protection because now if there's a slip and fall in that real property that's owned by that entity the only thing that that um creditor can go after is whatever is in that entity okay that was gonna be my next question right and we want to make sure the first layer of defense is you want

[34:08] to make sure there's enough insurance coverage liability insurance coverage for the property that um that you own that's being rented out so that's the first level of Defense gotcha well you know what we're we're uh we we've gone a little bit over time but so much great information here that actually I could keep talking to you for another hour I'm sure but I know we both have other things we have to do today so I I I want to thank you so much Jacqueline for coming on the show I I know people are going to find this very very interesting and useful

[34:44] and again especially as we head into next year and and the uncertainty about what's going to happen with the 2017 um you know tax law um this this is really something I I I did a show um a few weeks ago where I started encouraging people really start talking to your advisers about this now uh it may seem like it's far away you know over a year away but that's not a whole lot of time to figure these kind of things out so um you know for for those of you who are watching or listening you know if if if if you potentially fall

[35:21] into um you know the a situation where you're going to have to pay estate taxes now's the time to plan I'm dealing with a situation right now where uh the fellow died in test State large State um about a third of the state is being lost to estate taxes it's oh wow it's just you know tremendous loss to his heirs not that they're not getting a big pot of money they are but it it's you know we're talking big big big figures here so it's it's really it's really a shame that unfortunately he didn't do uh proper proper planning so um Jacqueline

[35:57] I'm going to I'll put your uh contact information in the show notes so thank you if anybody if if you would like to get in touch with Jacqueline her email address and her website will be there and I'm sure um jacine would be happy to speak with you about um whatever questions you have in in you know in this and other Arenas of estate planning so please don't hesitate to reach out for her so give me a minute here I'm going to wrap up the show and then we'll go offline and talk for a minute so folks thank you so much for watching today um I'm not even going to say I hope you found this informative you you

[36:33] had to have found this informative Jacklin is just brilliant with these kind with these kinds of Concepts and the clarity with which she um you know passed over the information so thank you so much for watching real quickly tomorrow at 10: am. Pacific time Tuesday is my show business lessons from the military and my topic is put a dog on your team so uh I'm going to talk about um dogs in the military for all of you dog lovers out there this is your show but I think you will find it really

[37:09] quite fascinating um the history of of dogs in the military and then on Wednesday at uh 10:00 a is my show people making money and my guest is going to be David Daly David is a Marine Corps veteran and drun drone pilot and he's going to talk about flying with his feet on the ground That's the basis on which he built his business so David is really kind of at The Cutting Edge of of technology and what he's doing with drones and so I invite you to tune in for that and then on Thursday this is my every other week

[37:46] show at 5:00 pm Pacific Time jiggers is place we'll sit back toward the end of the week have a cocktail and talk about the existential question right Faith versus reason what what should we be doing about that and this is kind of I think this question is probably Millennia old and and it is best discussed over a cocktail and uh the cocktail for this week is the Divine logic cocktail so you have to tune in to find out what that is but that this is a time for us to as I said toward the end of the week relax talk about all those

[38:23] other things in life besides our business and professions so I invite you to join me and then a week from today we'll be back for the next episode of trust and Estates weekly so once again thank you so much Jacqueline for being on the show today can't tell you how much I appreciate it and Sig off as I always do Marie darling you are my bell courage at all times