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By Julia S. Weaver, JD, LL.M.Managing Director & Family Office Fellow
By Kara J. Talbott, MSIA, CPA/PFS, CFP®Managing Director and Family Office Fellow

Doing Business with Your Family SLATs

Your SLAT is not a ‘Fund and Done.’ Read on to learn the many ways you can transact business with your new family trust1.

Several factors coalesced in recent years to prompt the funding of new family trusts such as Spousal Lifetime Access Trusts (SLATs) and other types of Irrevocable Grantor Trusts.

  1. Many families, prompted by concern over tax reform, made gifts to such trusts to take advantage of favorable trust laws and elevated gift and generation-skipping transfer (GST) tax exemptions ($13,610,000 per person in 2024). Wealth transfers in excess of these exemptions are taxed at the heavy rate of 40%.
  2. Other families, motivated by appreciating wealth due to strong markets, sought the impact of freezing their future estate tax sooner rather than later. Forward-thinking families also chose to act prior to the sunset of current laws, set for December 31, 2025, whereupon these exemptions are due to be cut essentially in half.

Regardless of the motivation, these families now have an ideal opportunity to transact business with their new (or more fully funded) family trust. They have created and capitalized the ultimate third party for business transactions.

Provided the formalities of a ‘normal course of business’ are followed, their trust may become their family bank, an asset-swapping partner or a purchaser of further assets in return for low interest rate promissory notes. When assets are purchased from properly structured family entities, valuation discounts can further reduce the amount of the family’s remaining taxable estate.

In addition to these generational tax savings strategies, the family’s trust may be structured with a family governance LLC to ensure the Grantor’s legacy footprint is cast deeply for generations to come.

Liquidity issues often arise when a family’s balance sheet is heavy with business interest, managed accounts, real estate or private equity, to name a few. Such trusts can make loans to family members without onerous collateral requirements and at the most favorable applicable federal rates (AFR). Further, the trust may make low interest loans to younger generations as they embark on new business ventures, home purchases or other investments, providing the next generation with a leg-up on building their own financial acumen.

Also known as a Power of Substitution, this power enables the trust grantor to swap assets of equivalent value between their personal balance sheet and the trust, maximizing tax savings impact in two key ways:

  1. Estate Tax Savings: First, because the trust is outside the reach of the 40% estate tax, it should hold the family’s most rapidly appreciating assets. The family’s ‘flat’ assets, such as a non-appreciating promissory note, should be held in the taxable estate where it will not increase estate tax exposure in future years.
  2. Income Tax Savings: Given our current law still allows for a step-up in basis at death to fair market value (FMV), families may at times elect to swap low basis trust assets back into the grantor’s estate. Assets of equivalent value are then transferred into the trust, where they will avoid the 40% estate tax.

For affluent families that have already utilized their full gift and GST exemptions, the IRS stands ready to receive their 40% share of the family’s growing balance sheet. This result can be mitigated by the grantor selling additional assets to their capitalized trust in return for low interest, non-appreciating promissory notes, often structured as balloon notes. The family only retains the interest payment from their trust.

While irrevocable for estate tax purposes, these trusts are grantor trusts for income tax purposes. When properly structured, a sale by the grantor does not cause a recognition of capital gains, providing a true ‘have your cake and eat it too’ planning opportunity.

To enhance investment opportunity and family wealth governance, the family may contribute assets to an entity eligible for valuation discounts. The grantor may then sell interest in the entity and take back a promissory note with a lower face value, further reducing taxable wealth. The resulting promissory notes are additional assets that can be contributed to family entities and also potentially entitled to discounts, all with the impact of further reducing the family’s future estate tax.

When the trust has been thoughtfully crafted with trusted fiduciaries and entity governance, the family is essentially doing business with their most trusted advisors. Your Oxford team brings a bespoke approach to your family’s wealth planning. Together with your team of outside advisors, we show families sophisticated strategies to capitalize on all aspects of their wealth transfer plan, today, tomorrow and for generations to come.

1Such trusts may be known as Intentionally Defective Grantor Trusts (IDGTs) or Intentionally Defective Irrevocable Trusts (IDITs).

Oxford Financial Group, Ltd. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Oxford Financial Group’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2404-67