Many commentators do not believe that a permanent fix for the federal tax will emerge…
What is a SLAT?
While a slat is commonly known as a thin, narrow strip or bar of wood or metal, a SLAT is also known to estate planning professionals as a Spousal Lifetime Access Trust (SLAT).
With the current lifetime estate and gift tax exemption at an all-time high of $11.7 million (and some people believe the new tax law may significantly reduce it), one trend that is gaining popularity for those looking to minimize their future tax burden, as well as protect assets, is a Spousal Lifetime Access Trust (SLAT).
A SLAT is a gift from one spouse to an irrevocable trust for the benefit of the other spouse. Unlike other types of credit shelter trusts, a SLAT is funded while both spouses are still living. The beneficiary spouse can receive distributions from the SLAT even though it is designed to be excluded from the beneficiary spouse’s gross estate and not be subject to estate tax when the beneficiary spouse dies.
What Exactly Is a SLAT?
A SLAT is a gift from one spouse (the donor spouse) to an irrevocable trust for the benefit of the other spouse (the beneficiary spouse). Similar to a so-called “bypass” or “credit shelter” trust, which: (i) receives assets having a value up to a deceased spouse’s remaining exemption from the federal estate tax; (ii) potentially benefits the surviving spouse; and (iii) prevents the value of the trust from being included in the surviving spouse’s gross estate and subject to estate tax when the surviving spouse dies, the SLAT is funded by gift while both spouses are alive. The beneficiary spouse can receive distributions from the SLAT, yet the SLAT is designed to be excluded from the beneficiary spouse’s gross estate and to not be subject to estate tax when the beneficiary spouse dies. To prevent the value of the assets of the SLAT from being included in the beneficiary spouse’s gross estate, the SLAT will not qualify for the gift tax marital deduction (either because the donor does not make the necessary election or the terms of the trust prevent it from qualifying).
A summary of some planning points and advantages are as follows:
- Irrevocable trust set up by one spouse for the benefit of the other spouse
- Trustee may be the beneficiary spouse
- Trustee may distribute income and principal as needed for the spouse for health, welfare, education, maintenance and support
- May give beneficiary spouse a limited power of appointment to “rewrite” the trust provisions on his/her death
- Allows the grantor spouse to have “indirect” access to the trust’s income and principal through the beneficiary spouse
- When the beneficiary spouse passes away, the appointed trust property (including appreciation) passes free of estate tax to the children (or other descendants)
- Protects the beneficiaries from creditors (or ex-spouses)
Now is the time to review your estate plan and consider capitalizing on additional techniques and strategies to protect your estate and minimize your potential estate tax, including the SLAT.
It is best to talk to an estate tax planning attorney and determine if a SLAT is a good option to allow you to take advantage of the favorable estate and gift tax exemption. This year, we have recently received unprecedented interest in SLATs due to President Biden’s tax plans to raise estate taxes. Now is the time to explore SLATs before it’s too late.
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