Companion chart to “The Optimal Basis Increase Trust” (https://ssrn.com/abstract=2436964) and LISI article Spousal Lifetime Access Non-Grantor Trusts “ING”=Incomplete gift, non-grantor trust (can be Delaware, Nevada, Ohio, South Dakota, Alaska, probably many of the DAPT states). “CG” = capital gains. “SLAT”=Spousal Lifetime Access Trust (Intervivos Bypass Trust); “IV QTIP”= intervivos qualified terminable interest property trust under IRC §2523 “SLANT”=Spousal Lifetime Access Non-Grantor Trust (may be 100% non-grantor). An IV-QTIP may be grantor trust as to acct income, non-grantor as to principal. “LLPOA” = lifetime limited power of appointment; TGPOA=testamentary general power of appointment; TLPOA=testamentary limited power of appointment
Key Features | SLAT (grantor) | IV QTIP (grantor) | ING (non-grantor) | IV QTIP grantor income Non-G for CG | SLANT non-grantor |
State Income Tax Features (assumes fiduciary/admin out of state) | |||||
Can avoid state income tax on interest, dividends, rent (acct. inc) (assuming settlor lives in state w/income tax) (*depends on state, see 50 state chart) |
no | no | yes* | no | Yes* |
Can avoid state income tax on capital gains and other taxable income allocated to principal (*depends on state, see 50 state chart) |
no | no | yes* | yes* | yes* |
Ny/NYC residents can avoid NY/NYC income tax on capital gains and other taxable income allocated to principal if no source income CA residents can avoid or at least defer CA income tax if not source *if no distributions to residents, see throwback tax | no | no | no | yes* | yes* |
Federal Income Tax Issues | |||||
Tax free “swaps” (sellor substitution of assets of equal FMV) | yes | yes*(2519?) | no | no | no |
Can use $453 installment sale to trust if trust sells > 2 years | no | no | yes | probably | yes |
Can shift tax w LLPOA to other beneficiaries to extent distributions | no | no | yes | no only spouse | yes |
Files Form 1041 (grantor trusts have optional reporting $1.671-4) | optional | optional | yes | yes | yes |
Can use Section 642(c) for better charitable tax deductions (note, however, new tax reform rules for ESBTs now using $170) |
no | no | yes | no | yes |
Estate inclusion/step up (and down) in basis at settlor’s death | no | no | yes | no | no |
Estate inclusion/step up (and down) in basis at spouse’s death | no | yes | no | yes | no |
Additional $10 million for (or 10x basis) QSBS/section 1202 exclusion | no | no | yes | yes | yes |
Additional $5 million installment sale interest avoidance section 453A | no | no | yes | no | yes |
Can remain community property for $1014(b)(6) double step up | no | no | maybe* (PLRs) | no | no |
Passive Settlor Can Hire Active Co-Trustee to Avoid NIIT on S/Psp Incom | no | no | maybe | no | maybe |
Asset Protection Considerations | |||||
Absent UVTA/UFTA transfer, corpus protected from creditors (*Huber /conflict of laws may apply settlor/debtor’s state law) |
yes | yes | probably* | yes | yes |
Must use DAPT state during life of spouse | no | no | yes | no | no |
17 Must use DAPT or state w/statute if settlor bene after spouse’s death (some states like AZ/FL protect “back end SLATs” as well as back end QTIPs *for SLATs (unlike QTIPs), potential trigger of IRC 2036 if settlor becomes bene |
probably* | yes | n/a | yes | probably* |
Exposes acct income to spouse’s creditors – no cessor clause can stop it | no | yes | no | yes | no |
Spouse can be removed upon divorce (“floating spouse”), but is it wise? | yes | no | yes | no | yes |
Potential Medicaid/govt benefits advantage after 5 years | yes | some | probably not | some | yes |
Federal Estate/Gift/GST Tax Features | |||||
Requires use of lifetime and/or annual gift tax exclusion to fund (*non-grantor trusts must be careful to avoid §678(a)(2) for Crummeys) |
yes | no | no | no | yes* |
Can exploit additional gift tax exclusion that may disappear in 2026 | yes | no | no | no | yes |
Can add older “upstream” beneficiary w/TGPOA for § 1014 basis increase (or w/TLPOA if exercised to trigger the Delaware Tax Trap 2041(a)(3) *would cause add’l gift, 1014(e) issue |
yes | no | no* | no | yes |
Can use Rev. Rul. 2004-64 power to reimburse settlor income tax but wise? (Rev. Rul. does not mention effect on IV QTIPs!) |
yes | probably not | n/a | probably not | n/a |
Can enable 15 month window to decide if gift, no gift for 2025/2026 cliff | no | yes | no | yes | no |
Must beware of reciprocal trust doctrine if cross-trusts (Est. of Grace ) | yes | no | no | less so | yes |
Can have broad trust protector, decanting power *(too broad powers may cause grantor trust or disqualify QTIP) |
yes | *limited | *limited | *limited | *limited |
TCJA Federal Income Tax Issues (May Sunset 12/31/2025) | |||||
May enjoy an additional Section 199A 20% QBI deduction if limited | no | no | yes | maybe* (if principal) |
yes |
May enjoy an additional $10,000 Section 164 SALT deduction | no | no | yes | maybe*(if principal) | yes |
© 2017-2024 Edwin Morrow III. Constructive criticism welcome. Contact: [email protected] Note that some trusts may be used in combination to get best of both worlds, e.g. one trust decants to or is deemed owned by another trust.