Trust Structuring

A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse (and potentially descendants). It allows the grantor spouse to use their lifetime exemption while the beneficiary spouse retains indirect access to trust assets. With the $15M permanent exemption under OBBBA, SLATs remain a cornerstone strategy for married couples. Both spouses can create reciprocal SLATs, but they must be sufficiently different to avoid the reciprocal trust doctrine (Estate of Grace, 395 U.S. 316, 1969).

• Uses grantor's lifetime exemption to shelter up to $15M from estate tax
• Beneficiary spouse has access to trust distributions
• Reciprocal SLATs must differ materially to avoid IRS challenge
• Grantor trust status means income tax is paid by grantor (further reducing estate)
• Can include descendants as beneficiaries for multi-generational planning

A GRAT allows the grantor to transfer assets to a trust while retaining an annuity for a fixed term. If the assets appreciate above the §7520 rate (currently 4.6% for April 2026), the excess passes to beneficiaries gift-tax-free. GRATs are particularly effective for assets expected to appreciate significantly (pre-IPO stock, rapidly growing businesses). "Zeroed-out" GRATs set the annuity equal to the gift value, resulting in zero taxable gift. Rolling (cascading) GRATs mitigate mortality risk.

• Current §7520 rate: 4.6% (April 2026) — must outperform this hurdle
• Zeroed-out GRATs have no gift tax cost
• Short-term rolling GRATs (2-year) reduce mortality risk
• Ideal for pre-IPO or high-growth assets
• If grantor dies during term, assets return to estate (no penalty, just no benefit)
• Cannot allocate GST exemption to a zeroed-out GRAT

An ILIT owns life insurance policies outside the insured's estate, ensuring death benefits are not subject to estate tax. For a $10M policy, this can save $4M in federal estate tax alone (40% rate). The trust must be the owner and beneficiary of the policy. The insured cannot retain any incidents of ownership (IRC §2042). If transferring an existing policy, the 3-year lookback rule under IRC §2035 applies — the insured must survive 3 years after transfer.

• Removes life insurance proceeds from taxable estate
• Annual premium payments qualify for gift tax exclusion via Crummey powers
• New policies avoid the 3-year lookback rule under IRC §2035
• Can provide estate liquidity without increasing taxable estate
• Second-to-die policies common for married couples
• Trust should be structured as a dynasty trust where state law permits

An IDGT is irrevocable for estate tax purposes but "defective" (treated as owned by the grantor) for income tax purposes. This allows the grantor to sell appreciated assets to the trust without recognizing capital gain (Rev. Rul. 85-13), and the grantor's payment of income taxes on trust earnings further depletes the estate tax-free. Installment sales to IDGTs are a powerful technique: the grantor sells assets for a promissory note, freezing the value for estate tax while all future appreciation passes to beneficiaries.

• Sale to IDGT is not a taxable event (Rev. Rul. 85-13)
• Grantor paying trust income tax = tax-free gift to beneficiaries
• Installment note freezes value; appreciation passes estate-tax-free
• AFR rate for notes: currently ~4.4% (April 2026 mid-term)
• Seed gift of 10% of sale price recommended for economic substance
• Trust must have sufficient assets to service the note

A dynasty trust is designed to last for multiple generations (potentially perpetually in states that have abolished the Rule Against Perpetuities). Combined with GST exemption, a dynasty trust can shelter wealth from estate, gift, and GST taxes for centuries. Top jurisdictions: South Dakota (no RAP, no state income tax, asset protection after 2 years), Nevada (365-year RAP, no state income tax), Alaska (1,000-year RAP, asset protection), Delaware (abolished RAP, Court of Chancery), Wyoming (1,000-year RAP, no state income tax).

• Can last perpetually in SD, DE, and other states that abolished RAP
• Allocate $15M GST exemption to shelter trust from transfer taxes indefinitely
• Situs selection critical: consider state income tax, asset protection, trust law
• South Dakota widely considered best jurisdiction (no income/estate tax, strong protections)
• Can hold virtually any asset class including business interests and real estate

Charitable Remainder Trusts (CRTs) provide income to non-charitable beneficiaries for a term, with the remainder going to charity. They offer an immediate income tax deduction and bypass capital gains on contributed appreciated assets. Charitable Lead Annuity Trusts (CLATs) are the inverse — charity receives annuity payments for a term, and the remainder passes to family. Zeroed-out CLATs (like zeroed-out GRATs) can transfer appreciation above the §7520 rate to heirs gift-tax-free.

• CRT: Income stream + charitable deduction + capital gain deferral
• CLAT: Transfer appreciation above §7520 rate to family tax-free
• CRT annual payout: minimum 5%, maximum 50% of initial FMV
• Remainder to charity must be at least 10% of initial FMV (CRT)
• CLATs particularly effective in low §7520 rate environments
• CRTs are tax-exempt entities — no capital gains inside the trust