Welcome to TaxView with Chris Moss CPA Tax Attorney
Domestic Asset Protection Trusts (DAPTs) and Spousal Lifetime Access Trust (SLATs) appear to be best practice in 2015 for Asset Protection and Estate Tax Reduction. The SLAT, which is nothing more than a DAPT for a family allows your Husband Grantor Settlor to appoint you his Wife as both Trustee and Beneficiary with your children appointed as successor Beneficiaries. If your SLAT becomes a member of the Family Business LLC you have an ideal estate tax reduction, asset protection, and additional annual income tax savings all created in an almost “too good to be true” legal tax structure and foundation. Are in fact DAPTs and SLATs too good to be true? Some feel the IRS is just waiting, patiently I may add, until you die to audit your estate and disallow the entire SLAT arguing before the US Tax Court that the SLAT corpus never legally left the Estate. So if you are interested in setting up a SLAT, stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out how to take advantage of these new Domestic Asset Protection Trusts without losing your advantage during an IRS SLAT Audit soon to be coming your way.
So what is a SLAT? A SLAT is an irrevocable DAPT established uniquely for a married couple, in many cases with children who ultimately become successor beneficiaries under newly enacted Sweet 16 State Protection Trust laws that allow the SLAT Husband Settlor Grantor to irrevocably gift his assets to his Wife, Trustee and Beneficiary with all lifetime distributions being made according to “ascertainable standard” as per IRS Code Section 2514, and IRS Code Section 2041 and Sweet 16 State laws, relating solely to the health, education, support or maintenance of in the case of a SLAT, your wife, both Beneficiary and Trustee. As Grantor Settlor you must make absolutely certain that you do not retain a life estate of any kind whatsoever in the Trust Corpus or Income Distributions in violation of IRS Code 2036. If you flawlessly insert a Spendthrift Clause in the Trust documents exactly according to State Law, and then finally appoint a non-family member Trust Protector or Co-Trustee you have what some would consider a “too good to be true” Estate plan.
The “too good to be true” folks out there may very well remember that prior to 1997, State Court Common Law for over 100 years held that these kind of Domestic Asset Protection Trusts were unenforceable and void against public policy. Yet one State legislature after another have in the last 20 years codified Trust Fund laws making legal what the Courts in Equity have prohibited. These DAPT and SLAT friendly 16 States (Sweet 16) Alaska, Colorado, Delaware, Hawaii, Missouri, Mississippi, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming are the only States in my view that you can safely create a DAPT or SLAT with some reasonable assurance that creditors could not reach your SLAT assets.
So what steps can you take to prove the “too good to be true” folks wrong. First keep your DAPT or SLAT within the “Sweet 16” as Sessions should have done in Rush Univ Med Center v. Sessions, N.E. 2d , 2012 IL 112906, 2012 WL 4127261 (Ill, Sept. 20, 2012) (Rush U). The facts in Rush are rather simple. Sessions established a DAPT which irrevocably pledged $1.5M to Rush. Rush commenced construction in reliance on the pledge. Sessions however was diagnosed with cancer that he blamed on Rush for failure to diagnose. He wrote Rush out of his Will before he died in effect voiding the $1.5M gift. Rush sued the Sessions estate in Rush v Sessions claiming the estate was liable for the $1.5. Lower Courts grappled with conflicts between the Common law in Equity and the Illinois Fraudulent Transfer Act with the Appeals Court eventually ruling for Sessions. However, the Illinois Supreme Court reversed noting that Sessions created a DAPT for his own benefit and used the “spendthrift clause” to protect the assets from Rush, a legal creditor. Justice Thomas further opined that regardless of state statute supporting Sessions, justice and fairness require that Illinois common law in equity void the “spendthrift clause” of Sessions DAPT and allow Rush to pierce the DAPT and collect their debt. Rush wins, Estate of Sessions loses.
If you are fortunate enough to live within the Sweet 16 how should you structure the SLAT so that when the IRS audits your SLAT your SLAT will survive intact and protected? Historically the US Tax Court has looked to States for guidance on whether or not an irrevocable trust is a valid transfer not subject to estate tax of the Settlor Grantor. For example inOutwin v IRS 76 T.C. 153 (1981), Outwin created various irrevocable trusts under Massachusetts law with Outwin being the sole Beneficiary during his lifetime with family friends as trustees. The IRS audited and claimed gift taxes were not paid on what the IRS claimed was an irrevocable transfer out of Outwins’s estate. Outwin appealed to US Tax Court inOutwin v IRS 76 T.C. 153 (1981) arguing that he never lost control over the trust because he was the “sole Beneficiary” of the fund assets and therefore no legal gift had been transferred.
Judge Dawson goes further asking whether Outwin’s trusts could be subjected to the claims of the settlor’s creditors under Massachusetts law. Citing Ware v Gulda 331 Mass. 68, 117 N.E.2d 137 (1954) the Court finds that under Massachusetts law Outwin’s trust fails to relinquish dominion and control for gift tax purposes if creditors can reach the trust assets. Concluding there is a strong public policy in Massachusetts common law against persons placing property in trust for their own benefit while at the same time insulating such property from the claims of creditors the Court finds for Outwin. IRS loses, Outwin, wins.
So in conclusion, to make your SLAT bullet proof against an IRS SLAT Audit, first, make sure you retain a tax attorney who knows his Sweet 16 SLAT law and knows it well. Have that same tax attorney file all tax returns. Second, have your tax attorney structure the SLAT so that you Settlor Grantor Husband appoint your wife as Trustee and as a primary Beneficiary receiving beneficial ascertainable standard distributions for her health education support or maintenance in accordance with IRS Code Section 2041(a)(2), (b1) and (b)(2) making sure you Husband Grantor Settlor are not in violation of IRS Code Section 2036 by not retaining a life estate in the Trust corpus or income. Third make sure your SLAT is absolutely protected from Creditors by inserting exact word for word language of the Spendthrift provisions of your State’s Domestic Asset Protection Trust laws. Finally, Appoint a non-family member Trust Protector or independent Co-Trustee to give you that extra added protection when the IRS comes on over soon after you are gone. If you stayed married for the duration, on the day of your passing, you can rest in peace knowing your Wife and children are protected from a very likely IRS SLAT Audit coming your way, with your family Business and Estate bulletproofed in a safe and protected SLAT tax strategy and structure for many years to come.
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Chris Moss CPA Tax Attorney