Estate Planning for 2021 and Beyond: SLATs

The estate and gift tax exemption, which allows each U.S. person to pass a certain amount of assets free of the federal estate and gift tax, was doubled under the 2017 Tax Cuts and Jobs Act. The current estate and gift tax exemption is $11.58 million per person ($23.16 million per married couple); however, this increased amount is set to expire in 2025 and revert to a $5-million base per person. Furthermore, there is a significant legislative risk that the increased amount may be reduced even earlier depending on the success of President-elect Biden’s previously-announced tax plans to raise estate taxes.  

Specially drafted trusts such as a spousal lifetime access trust (SLAT) may provide a unique solution, allowing you to take advantage of the estate and gift tax exemption, but with a potential safety net because the beneficiary-spouse may still access those assets if needed. A SLAT can also be designed as a dynasty trust. 

A SLAT is a type of irrevocable trust that may be used to preserve the transfer tax benefit of the increased exemption amount while also building flexibility into the estate plan. A SLAT is an irrevocable trust established by one spouse for the benefit of the other spouse and the couple’s children and/or grandchildren. It requires use of the donor spouse’s exemption amount to protect the transfer from gift tax. When funding the SLAT, the grantor-spouse should use his or her separate property, as opposed to jointly owned or community property (this could make the transferred property includible in the estate of the beneficiary-spouse). 

Spousal access to the funds in a SLAT is not unlimited. If distributions are made to the beneficiary-spouse, who consistently uses them to benefit the grantor-spouse, this could be considered a retained interest on the part of the grantor-spouse and make the trust assets includible in the grantor-spouse’s estate for estate tax purposes.

If there is a divorce or the beneficiary-spouse dies, the grantor-spouse will lose indirect access to the trust. Accordingly, the grantor-spouse may want to limit the amount transferred to the trust, or provide that if the grantor remarries, the new spouse will be a trust beneficiary or that the trustee may lend trust property to the grantor. 

The SLAT is an important tool that may allow a grantor-spouse to take full advantage of the increased exemption amount while permitting indirect access to the trust funds by way of the beneficiary-spouse’s interest. Ideally, however, this access would never be needed, and as long as the grantor-spouse is still responsible for paying the trust’s income tax liability, an even greater amount of assets will pass to the next generation, free of federal estate and gift tax.

We have recently received unprecedented interest in SLATs due to President-elect Biden’s tax plans to raise estate taxes. Now is the time to explore SLATs before it’s too late.