Hayes Crafts SLAT: Shielding $8M with Controlled Access

Hayes Crafts SLAT: Shielding $8M with Controlled Access

Executive Summary

New Horizons Financial was approached by Mr. Hayes, who sought to protect a substantial portion of his $15 million estate from potential creditors and minimize future estate taxes, while ensuring his wife, Susan, had access to those assets if needed. Recognizing the unique circumstances, New Horizons Financial structured a Spousal Lifetime Access Trust (SLAT), strategically gifting $8 million of Mr. Hayes' assets into the trust for Susan's benefit. This move effectively shielded a significant portion of the estate, providing a robust layer of asset protection and minimizing estate tax liability, all while allowing Susan to benefit from the assets within the trust.

The Challenge

Mr. Hayes, a successful entrepreneur with a net worth of approximately $15 million, faced a two-pronged challenge. First, his business, while thriving, carried inherent liability risks, making a portion of his wealth vulnerable to potential future creditors. He was deeply concerned about protecting his family's financial security from unforeseen legal challenges. Second, with the current estate tax laws, he recognized that a significant portion of his estate could be subject to estate taxes upon his and Susan's passing, potentially diminishing the legacy he wished to leave for his children.

More specifically, Mr. Hayes was aware of a potential lawsuit looming from a previous business deal. While he believed he had a strong defense, the potential settlement could reach upwards of $2 million. This threat spurred him to actively seek asset protection strategies. Furthermore, projections indicated that, without proactive planning, the estate tax liability could be as high as $3.2 million based on current law, eating into a significant portion of his hard-earned wealth.

He also expressed a strong desire to ensure his wife, Susan, was financially secure regardless of external risks. Traditional irrevocable trusts, while offering significant asset protection, often severely limit or eliminate the grantor's access to the assets. Mr. Hayes wanted a solution that provided protection but allowed Susan to access funds from the trust if needed for living expenses, medical needs, or other unforeseen circumstances. This created a complex tension between asset protection, tax minimization, and spousal access, requiring a sophisticated and tailored approach. The goal was to protect at least $8 million of the estate while ensuring Susan could maintain her current lifestyle.

The Approach

New Horizons Financial conducted a thorough analysis of Mr. Hayes' financial situation, including a detailed review of his assets, liabilities, estate planning documents, and risk profile. After carefully considering his objectives, we recommended the creation of a Spousal Lifetime Access Trust (SLAT).

The strategic rationale behind the SLAT was multifaceted:

1. Asset Protection: By gifting assets into an irrevocable trust, those assets are generally shielded from the grantor's creditors. The trust's terms dictate how and when the assets can be distributed, further insulating them from direct attachment by creditors.

2. Estate Tax Minimization: The gift of assets to the SLAT removes those assets and their future appreciation from the grantor's taxable estate, reducing the overall estate tax liability upon death. The current federal estate tax exemption, while generous, is subject to change, making proactive planning essential.

3. Spousal Access: Because the spouse is the beneficiary of the SLAT, she can access the trust assets according to the terms of the trust document. This provided Mr. Hayes with the peace of mind that Susan would have access to the funds if needed, addressing his primary concern.

The decision framework involved several key steps:

• Fact-Finding: A comprehensive interview process to understand Mr. Hayes' financial goals, risk tolerance, and family dynamics.
• Needs Analysis: Quantifying the potential exposure to creditors and calculating the estimated estate tax liability.
• Solution Design: Developing a customized SLAT structure that balanced asset protection, tax minimization, and spousal access.
• Legal Review: Collaborating with Mr. Hayes' estate planning attorney to ensure the SLAT documents complied with all applicable laws and regulations.
• Ongoing Monitoring: Regularly reviewing the SLAT's performance and making adjustments as needed to reflect changes in Mr. Hayes' financial situation, tax laws, or Susan's needs.

Technical Implementation

The creation and implementation of the SLAT involved several technical steps and considerations:

1. Asset Selection: Working closely with Mr. Hayes to determine which assets to gift to the SLAT. Given the potential for future appreciation, we recommended transferring appreciating assets, such as publicly traded stocks and real estate. We selected $3 million in stock holdings and a commercial property valued at $5 million for initial funding.

2. Trust Document Drafting: Collaborating with Mr. Hayes' attorney to draft a customized SLAT document. The trust document specified Susan as the primary beneficiary and outlined the terms under which she could access the trust assets. The document also included a spendthrift clause to protect the trust assets from Susan's creditors. Reciprocal trust provisions were carefully avoided to ensure the validity of the SLAT.

3. Gifting Strategy: Structuring the gift of assets to the SLAT to minimize gift tax implications. Mr. Hayes utilized his available lifetime gift tax exemption to transfer the $8 million worth of assets to the trust. Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) was accurately completed and filed to report the gift.

4. Trust Administration: Establishing a formal trust administration process, including selecting a trustee (a corporate trustee was recommended for impartiality and expertise), opening a bank account in the name of the trust, and maintaining accurate records of all trust transactions.

5. Valuation and Appraisal: Obtaining independent appraisals for the commercial property to establish its fair market value for gift tax purposes. This was crucial to substantiate the value of the gifted asset and minimize the risk of an IRS audit.

6. Ongoing Monitoring: Continuously monitoring the performance of the assets held in the SLAT and making adjustments to the investment strategy as needed to align with Susan's needs and the trust's objectives. We also regularly reviewed the trust document to ensure it remained compliant with all applicable laws and regulations. Furthermore, we actively monitored any changes in tax laws that could impact the SLAT's effectiveness and made recommendations for adjustments as necessary.

Results & ROI

The implementation of the SLAT yielded significant benefits for Mr. Hayes and his family:

• Asset Protection: $8 million in assets were effectively shielded from potential creditors, providing Mr. Hayes with peace of mind knowing that a significant portion of his wealth was protected from unforeseen legal challenges. This represented a substantial reduction in his personal liability exposure.

• Estate Tax Savings: The transfer of $8 million in assets to the SLAT removed those assets and their future appreciation from Mr. Hayes' taxable estate, potentially saving his heirs over $3.2 million in estate taxes (assuming a 40% federal estate tax rate). The removal of the appreciating assets from the estate is projected to save an additional $500,000 in estate taxes over the next 10 years, based on an estimated average annual appreciation rate of 6%.

• Spousal Access: Susan retained access to the funds held in the SLAT, providing her with financial security and peace of mind knowing that she could access those funds if needed for living expenses, medical care, or other unforeseen circumstances.

• Increased Financial Security: The SLAT provided Mr. Hayes and his family with increased financial security and peace of mind, knowing that their wealth was protected from potential risks and that Susan would be financially secure.

• Reduced Estate Planning Complexity: While implementing the SLAT required careful planning and execution, it ultimately simplified Mr. Hayes' overall estate plan by addressing multiple objectives in a single, coordinated strategy.

• ROI Calculation: While difficult to quantify precisely, the intangible benefits of peace of mind and increased financial security were significant. The tangible benefit of reduced estate taxes alone represented a substantial return on the initial investment in legal and advisory fees associated with establishing and administering the SLAT. Furthermore, the asset protection component provides an unquantifiable, but valuable, insurance against potential future liabilities.

Key Takeaways

For other advisors considering SLATs for their clients, here are key takeaways:

1. Understand Client Objectives: Thoroughly assess the client's goals for asset protection, estate tax minimization, and spousal access. A SLAT is not a one-size-fits-all solution and requires careful tailoring to individual circumstances.

2. Collaboration is Key: Work closely with the client's estate planning attorney to ensure the SLAT documents are properly drafted and compliant with all applicable laws and regulations.

3. Accurate Valuation is Crucial: Obtain independent appraisals for any non-cash assets being gifted to the SLAT to establish their fair market value for gift tax purposes.

4. Educate Clients on Reciprocal Trust Doctrine: Ensure clients understand the potential pitfalls of reciprocal trusts and the importance of avoiding any arrangements that could be construed as such.

5. Regular Monitoring and Review: Continuously monitor the performance of the assets held in the SLAT and review the trust document periodically to ensure it remains aligned with the client's objectives and compliant with all applicable laws.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors identify and analyze complex planning opportunities like SLATs, and generate customized client proposals faster and more efficiently. Visit our tools to see how we can help your practice.