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In today’s world of bank failures, declining real estate and stock markets, hurricanes, floods, and atmospheric rivers, the only sure thing is uncertainty and the potential for change in the future. This potential for uncertainty highlights the need for flexibility in a seemingly black and white world Estate planning and transfer wealth with tax efficiency. The gift must be “completed” in order to generate savings on estate taxes.
However, the current law provides for a solid lifespan real estate tax An exemption of $12.92 million per person ($25.84 million for a married couple). The current law also states that this exemption will decrease to $5 million per person ($10 million per couple) on January 1, 2026. The 2026 estate tax exemption is adjusted for inflation and is estimated at $6.08 million per person ($12.16 million). (the couple) for the year 2026.
For those with a net estate of more than $6 million per person ($12 million per couple), consideration should be given to planning to avoid the 40% federal estate tax on amounts over the 2026 estate tax exemption.
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However, the fear of economic uncertainty increases the need for flexibility in any such plan. Many clients do not want to pass on their significant wealth to the next generation in the event that they lose all access to it in the event that their needs change or they suffer a loss. The following alternatives have been chosen because of the flexibility that may be available for future access by the customer if required.
Note that the 2023 estate tax credit also provides the 2023 estate tax credit. Gift tax The exemption is the same amount and this allows for the transfer of significant wealth without causing a gift tax liability. The gift tax credit will also decrease or decrease on January 1, 2026.
From the perspective of asset protection, if it is directly named as the beneficiary of the trust and trust Provides for the direct distribution of trust assets, then state law usually allows creditors to access those assets. For example, California Wills Code Section 15304(b) states, “If you are a beneficiary of a trust…the creditor may up to the maximum amount that the trust can pay to you or for your benefit.” For this reason, direct distributions to beneficiaries, even of simple trusts, must include some safeguards to guard against third-party attacks such as those from divorce, lawsuits, creditors, and even bankruptcy trustees. The simple requirement is that the trust funds be held to enable the trustee to make “discretionary distributions of principal and income”.
This type of tax planning usually provides better or enhanced asset protection for you and your family or loved ones. This is becoming increasingly important in today’s world of uncertainty and litigation.
DAPT, or Domestic Asset Protection Fund
A DAPT is a self-settled (meaning you set up the trust for yourself) trust established in one of 20 states in the United States that allows a self-settled trust to provide protection from creditors, lawsuits, and divorce (for example, in-laws, outlaws, and other Predators). The 20 states that allow DAPT are:
| Alabama | Alaska | Connecticut | Delaware |
| Hawaii | Indiana | Michigan | Mississippi |
| Missouri | nv | New Hampshire | Ohio |
| Oklahoma | Rhode Island | South Dakota | Utah |
| Virginia | West Virginia | Wyoming | Tennessee |
Each state has different laws and has different advantages and disadvantages. Careful analysis is needed to select the best jurisdiction.
The DAPT fund does not provide direct financial access to your wealth, but the grantor (the person who created and funded the fund) may be designated as a beneficiary. Distributions to you as the grantor may be subject to separate discretion or approval by an independent managing trustee who can help stop third party attacks or unwanted claims.
A professional custodian is often used as the distribution custodian or managing custodian, while the client retains full control of the investment as the investment custodian. The DAPT version is often referred to as a hybrid DAPT. With a hybrid DAPT, neither the customer nor the trustee is initially named as the beneficiary. Another person, usually a “trustee”, is given special or limited non-fiduciary designating authority to add beneficiaries to the trust. This addition can include the customer as an individual or as a member or group of the Beneficiary category.
Note that some concerns persist that use of DAPT by a resident of a non-DAPT country may not be successful.
SPAT, or Special Designation Fund
SPAT allows access to trust assets without directly naming them as the beneficiary. You are not a trustee or beneficiary of a trust, but a trusted person can direct the distribution to you at a safe future date.
Because you are neither a custodian nor a beneficiary, greater protection of assets is provided. The trust itself is not described as a “self-settled trust” and is subject to the jurisdiction of the state law referenced above with respect to DAPT. For example, California Probate Code Section 681 states: “Property covered by special power of appointment is not subject to the donor’s creditors, the donor’s estate, or the donor’s property expenses.”
SLATs, or Spousal Lifetime Access Funds
SLATs allow each spouse to be the beneficiary of the trust formed by the other spouse. In any of the community property states such as the states listed below, it is recommended to use a postnuptial agreement to transfer assets, income, and debts from the community property to the separation. The cases of community ownership are:
| Alaska | Arizona | California | Colorado |
| fl | Idaho | Illinois | Louisiana |
| nv | New Hampshire | New Jersey | New Mexico |
| North Carolina | Oregon | South Dakota | Tennessee |
| Texas | Washington | Wisconsin | Row 4 – cell 3 |
Each spouse establishes and funds a trust for the benefit of the other spouse. This can result in the removal of that property from the ownership of one of the spouses. Care must be taken not to set in motion the principle of mutual trust, which is triggered if the two trusts are: (1) correlated and (2) an arrangement such that the limit of mutual value leaves the spouses in the same position they would otherwise have been. If only they had created themselves as beneficiaries of life. This usually happens if the trust provisions are very similar.
In order to avoid the principle of mutual trust, care should be taken to build the differences between the two trusts. Different secretariesGoverning law, timing of gifts, designated recipients, distribution criteria, opt-out rights, and appointment powers must be taken into account when crafting a couple’s SLAT.
The ruthless “all or nothing” approach to planning to minimize or avoid property taxes is no longer required. Careful planning can provide greater flexibility. Today’s uncertain economic environment underscores the need to plan to better protect assets and your family’s legacy from third party attacks.
The most important consideration is whether your estate and asset protection planning meets your long-term goals aside from the tax savings and asset protection benefits. Too often, people quickly pick a common acronym to use for asset protection or tax planning with little regard for their long-term goals. Only after clearly defining your long-term goals should you seek out the most efficient use of tax tools.
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