Why SLATs (Spousal Lifetime Access Trusts) Are Worth Your Attention
As a result of a recent article published by our law firm, our office has been receiving the following questions: “Do I have a SLAT?” and “What is a SLAT?” If you’re not familiar with this term, a “SLAT” is not the latest COVID-19 variant but rather the acronym for a “Spousal Lifetime Access Trust.” Spousal Lifetime Access Trust planning is an effective estate planning technique used by married couples who wish to reduce estate taxes and protect assets from creditors.
Historically, a common estate planning technique is for high net worth married couples to create revocable living trusts that are structured to take full advantage of the estate tax exemption of each spouse upon death in order to reduce estate taxes due to the IRS. Although this continues to be a viable planning technique, the Federal estate tax exemption is a political football that for the next four years will create uncertainty. The current Federal estate tax exemption for 2021 is $11,700,000; however, there are reports that Congress may reduce this amount to as low as $3,500,000 and increase the estate tax rate to 45% (it is currently a rate of 40%). A reduction in the Federal estate tax exemption (an $8,200,000 reduction) for someone with an $11,700,000 estate could result in an estate tax liability owed to the IRS of $3,700,000!
In light of the results of the 2020 Federal elections, there is an increased likelihood that the Tax Cuts and Jobs Act of 2017, which significantly increased the estate, gift, and generation-skipping transfer (“GST”) tax exemption amounts to current levels, will be amended or repealed prior to 2025. The effective date of any such changes is uncertain, but it could be any time in 2021.
So the question is then how to lock in or take advantage of the higher estate tax exemption before Congress changes it? That is where a SLAT comes in.
What is a SLAT? A SLAT is an irrevocable trust which one spouse typically established for the benefit of the other spouse. That is, you can establish a trust for the sole benefit of your spouse during your spouse’s lifetime. The trust can allow distributions of trust assets to your spouse, which indirectly provides you with access to the trust while also protecting the assets from creditors.
A gift to a SLAT is a completed gift which removes the assets transferred to the SLAT from your and your spouse’s taxable estates for estate tax purposes. For instance, if you make a gift of $11,700,000 to a SLAT before the estate tax exemption is reduced, you will have effectively removed assets and their appreciation from your estate that otherwise would have been subject to the estate tax.
If a SLAT sounds like the way to go for you and your spouse because you want to take advantage of the current estate tax exemption while also giving your spouse the benefit of the gifted assets, before diving in you do need to be aware of some other considerations:
- The trust is irrevocable and cannot easily be changed once the trust is established.
- You must give up control over the assets transferred to the trust and cannot directly request access to the assets in the trust or a distribution from the trust (although you can receive indirect benefits from your spouse who is the beneficiary of the SLAT).
- The basis of the assets of the SLAT will not qualify for a step-up in basis upon the death of either spouse.
- If you or your spouse divorce, you may lose the indirect access to the SLAT.
- If your spouse has an untimely death, you will lose indirect access to the SLAT; however, the trust will continue for your remainder beneficiaries (such as your children).
- Generally, you should not include in a SLAT assets that are needed for your support, living expenses, or lifestyle. Your financial advisor may be able to help you prepare forecasts regarding this.
Those who have not already utilized the increased exemption amount but are considering doing so should call us immediately to discuss the options for making gifts or establishing a SLAT in 2021 in order to account for the possibility that the law and available exemptions may change at any time.
Contact any member of the GSRNH estate planning team if you want to discuss whether a SLAT is right for you. Please call us at 630-655-6000 or email us at INFO@GSRNH.COM.
“You’ll always be glad you did vs. you wish you had!”