SPECIAL POWER OF APPOINTMENT TRUST (SPAT)
With Democrats winning the Georgia Senate runoff races, we have a Senate that is evenly split. That means that, in the event of a tied vote on a tax bill, Vice President-elect Harris will cast the deciding vote as the president of the Senate. Given this, it is more likely than not that the Democrats will substantially reduce the federal estate, gift and generation-skipping transfer tax exemption amount from the current $11.7 million level, as they have proposed. While this reduction of the exemption amount could be made retroactive to January 1, 2021, that seems like the less likely scenario, for a number of reasons. The reduction of the exemption amount may be further accompanied by an increase in the top tax rate for federal estate, gift and generation-skipping transfer tax from 40 percent to 45 percent.
Given the foregoing, we face a “use-it-or-lose-it“ opportunity to potentially save millions in future estate taxes. It is important to note that fully utilizing this increased exemption amount prior to a reduction thereof could save millions in estate tax, and even more if the transferred property appreciates before the donor's death, given that the gift removes both the property and the future appreciation from the estate tax base.
A Special Power of Appointment Trust (or SPAT) is an estate planning tool that can be used to take advantage of the increased exemption amount. A SPAT is especially useful for clients who want to preserve access to the assets transferred to irrevocable trusts or who require flexibility in their planning. Using a SPAT, the grantor makes a gift to an irrevocable trust for the benefit of the beneficiaries. The grantor also grants an individual (called an "Appointer"), the power to direct the trustee to make distributions of trust assets to an individual included within a special class of persons (for instance, descendants of the grantor's grandparents) or to anyone other than the Appointer, his or her creditors, his or her estate, or creditors of his or her estate. This power of the Appointer is called a special power of appointment. This power would further provide the Appointer with the ability to direct the trustee to make distributions to the grantor. Given the foregoing, the SPAT is a particularly attractive technique because the grantor is not a beneficiary of the trust; however, the special power of appointment may be utilized as a means to, if desired, give assets back to the grantor at some future point, while also maintaining asset protection benefits.
SPATs are typically structured as grantor trusts, such that the trust is disregarded as being separate from its grantor for income tax purposes. Trust income is, thus, taxable to the grantor and is reported on the grantor's personal income tax return.