With a flurry of news and headlines at both the state and federal levels about potential estate and gift tax law changes, individuals and their advisors are re-evaluating their estate planning tools. As a result, use of Spousal Lifetime Access Trusts (SLATs) have come back in focus. Our resource will explore the opportunities and challenges with using a SLAT in more detail.
Trends in Estate Planning for Slat Trust
One of the challenges currently with estate planning is the uncertainty of the future estate and gift tax regime. As it stands, the lifetime gift and estate tax exemption amount is at its all-time high of $11.7 million per person in 2021, with $23.4 million per married couple. The thresholds for the gift and estate tax nearly doubled with the passage of the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA). Reverting the threshold to pre-TCJA levels – about $5 million per person and $10 million per married couple was a topic of considering during President Biden’s campaign. Even absent tax reform changes being discussed that would change the thresholds sooner, those exemptions raised by the TCJA will revert back to $5M per person and $10M for married couples, as adjusted for inflation after Dec. 31, 2025.
For high net worth families, a SLAT can be an effective estate planning tool to lock in these higher lifetime gift and estate tax exemption amounts, along with achieving other long-term estate planning goals such as shifting wealth to the next generation or even grandchildren.
What is a Spousal Lifetime Access Trust (SLAT) and When Does a SLAT Make Sense?
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust, typically for income tax purposes. It is a grantor type trust whereby one spouse makes a gift in trust for the other spouse with the goal of removing assets and future appreciation in assets from their combined estates. Each spouse can work to create a SLAT for the other spouse, meaning that a combined $23.4M may be sheltered from future estate and gift tax along with any post-gift appreciation.
Donor spouses use their federal estate and gift tax exemption for gifting assets to the trust for the benefit of the non-donor spouses. Children and grandchildren can also be named as future beneficiaries of the SLAT. During his or her lifetime, the non-donor spouse can then request income and principal distributions from the SLAT to maintain lifestyle and standard of living.
The non-donor spouse can also serve as trustee over his/her trust with the ability to make distributions of both principal and income for health, education, maintenance and support. A SLAT can be created for both spouses as well, provided that the “reciprocal trust doctrine” is not violated (which is typically a matter of having enough time between both trusts being established and having different trust language in each agreement).
Benefits to SLAT Planning
The obvious benefit of the SLAT is removing assets from both the donor’s taxable estate, as a taxable gift, and from the non-donor spouse’s taxable estate as well. As grantor type trusts, SLATs also mean that future growth in trust assets can be free of income tax as the donor-spouse continues to pay annual income tax on taxable trust income. If SLATs are funded during the current historic high estate and gift tax exemption amount, the donor-spouse effectively locks in the higher exemption amount of $11.7M upon funding the trust as the Treasury Department has confirmed that there will not be a future gift tax due (clawback) on lifetime gifts should the exemption revert back to a lower amount in 2026 or prior to that date through tax reform. Lastly, SLATs give the family the opportunity to shift wealth to the next generation, children or grandchildren, in the form of dynasty gifts that with appropriate planning may be free of generation-skipping transfer tax (GST).
Similar to a Credit Shelter Trust, assets in a SLAT should be considered secondary to assets outside of the SLAT, as the goal of the SLAT is to let assets appreciate outside of the estate and for future generations whenever possible. In order for the IRS to accept the gift nature of SLAT assets as being out of the donor spouse’s taxable estate, SLAT assets should really be considered as an emergency fund as it’s best not to “break the glass” of the trust and use assets and income for the non-donor spouse’s lifestyle spending. In many cases, for families, with assets north of $100 million, spouses might also consider just making direct gifts to children or grandchildren via dynasty trusts if there is a good chance SLAT assets won’t be needed in either spouse’s lifetime. Dynasty trusts for children and grandchildren would face less IRS scrutiny as compared to gifts that run through SLATs.
For states with an estate tax, such as Washington or Oregon, a SLAT may also be a tool to save on potential future state transfer taxes.
Risks of SLATs and Items to Consider
The main disadvantage of SLATs is that in the event of death of the non-donor spouse, the original donor spouse loses access to trust assets as the trust would then terminate with assets going to children or contingent beneficiaries of trust. The same caution applies in the event of divorce, unless language is added to the trust document that would terminate the non-donor spouse interest in the event of separation.
Another consideration with SLATs is that because the assets gifted in trust are completely removed from the donor’s estate, there would not be a step-up in basis (when the tax basis in assets are stepped up to the date of death fair market value) in SLAT assets upon the passing of the donor-spouse. A planning tool for this would be adding a swap power to the trust to allow the donor spouse to swap assets into the trust later (with higher basis) versus having low basis assets in the SLAT that would have more potential benefit from a date of death step up. Generally, most asset types can be used to fund a SLAT, including life-insurance, stocks and bonds, cash, real estate, certain interests in closely held businesses or private company stock. As a practical matter, assets that have the most potential for future appreciation and with the lowest basis, make the most sense for initial SLAT funding.
Finally, special consideration should be given to President Biden’s Green Book proposal from May that suggests gifts over $1 million for lifetime gifts would be a triggering event with income tax due on large gifts. President Biden also proposed elimination of the step-up in basis provision that has existed for roughly 100 years. The estate planning community is still analyzing this proposed legislation for how that might affect gifts to SLATs and what that would mean in terms of optimal assets to gift to a non-donor spouse with a SLAT structure.
The below table provides a quick summary of the pros and cons of SLATs:
Lock in higher estate exemption amounts
Assets at term of trust cannot benefit original donor-spouse. Assets and income from trust considered secondary, don’t touch for lifestyle spending if possible.
Carve out post-gift appreciation from estate
No basis step up
Keep assets in trust for spouse and next generation
Complexity – requires working with qualified estate and tax professionals
Creditor protection and fiduciary oversight
Gift tax return required upon funding
In summary, SLATs may be a great way to lock in higher gift and estate tax exemptions now and efficiently transfer wealth as those exemptions may be soon be reduced. Special care should be taken to consider both the pros and cons of SLATs and clients should work with a qualified estate planning attorney, along with your trusted CBIZ tax advisor, to determine if a SLAT is right for you. Contact a member of our team for more information.
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