Letter from the President: October 2019
Dear M&B Clients & Professional Partners:
The tax code is often like the Temple of Doom and clients, unknowingly at times, are like Indiana Jones escaping the various potential terrors. Each decision has a consequence and each chosen path has the potential to have trap doors, dead ends, flying arrows, and other undesired consequences. The estate tax attorney is like the temple guide. We say, “turn here”, “don’t do that”, “go that way”.
While Myatt & Bell, PC (M&B) is known to provide easy to understand explanations, there are some things that just are not easily explained. A Special Formula General Power of Appointment (SFGPA) is one of these complex tax tools. Even the name sounds intimidating. Beginning in 2018, we started regularly including the SFGPA in our estate tax planning trusts. In this letter, I’m going to let you know how it is used and steps to check your documents to see whether it is included in your joint Living Trust (unfortunately, this is not a tool that can be used for single individuals).
What is a SFGPA? By way of background, the SFGPA is used in joint Living Trusts that provide, at the death of the first spouse, for a Family Trust (for a deceased spouse’s assets) and a Survivor’s Trust (for a surviving spouse’s assets), often referred to as an “AB Trust”. The summary benefit of an AB Trust is that the Family Trust assets are not included in the Survivor’s estate for estate tax purposes at the surviving spouse’s death. A potential detriment of such AB Trust, however, is that the assets in the Family Trust do not get a stepped up in income tax basis at the death of the surviving spouse. This means that an AB Trust has the potential to save estate taxes while potentially causing increased income tax liability down the road. Since income tax rates are currently higher than Oregon state estate tax rates, that may not be a good net outcome. The SFGPA is a planning strategy that allows us to plan for both.
In effect, if the Family Trust asset grow in value to such amounts that income tax liability would exceed estate tax liability, then the SFGPA automatically pulls back the Family Trust assets into the surviving spouse’s estate. The SFGPA thereby increases estate tax liability but saves more on income tax liability. The SFGPA’s goal is to provide the lowest overall tax rate between the estate tax and income tax.
In greater detail, the SFGPA is a mathematical formula that operates at the death of the surviving spouse to direct which trust (Family Trust or Survivor’s Trust) is best for estate tax and income tax reasons. In order to take advantage of this tax saving strategy, the SFGPA must be present in your joint Living Trust while both spouses are living.
Does my trust have a SFGPA? To check whether your Living Trust has a SFGPA, first determine whether you have one joint Living Trust for you and your spouse or whether you have two separate Living Trusts, one for you and one for your spouse.
If you have one joint Living Trust for you and your spouse, then the SFGPA is found in the Family Trust article. Check Article Nine, Section Four of your Living Trust. The section will be titled: Special Formula General Power of Appointment.
If you have two separate Living Trusts, one for you and one for your spouse, then the SFGPA is found in the Family Trust article. Check Article Eight, Section Five of each Living Trust. The section will be titled: Special Formula General Power of Appointment.
If you would like to include the SFGPA or would like more information then please do not hesitate to contact us. From our experience, since 1960, let us help you create peace of mind when it’s needed most. Call Myatt & Bell, P.C., at 503-641-6262, to setup your annual review, gifting meeting, or family meeting appointment.
-Justin R. Martin