Intricacies to Consider when using a SLAT

May 30, 2023

Making plans for the events of the future not only saves your family time and money but will also provide peace of mind to you and your beneficiaries, advises the article “Learn about options for estate planning and wealth transfer” from The Tennessean. One of the tools used in estate planning is the Spousal Lifetime Access Trust (SLAT), an especially useful trust now that lifetime exemptions are set to decrease at the end of 2025. There are a number of intricacies to consider when using a SLAT in your estate planning.

No federal estate taxes are owed for individuals with assets up to $12.92 million and married couples with $25.84 million in 2023. However, federal estate taxes are owed at a maximum rate of 40% for any wealth above these amounts.

This is of particular interest right now. The Tax Cut and Jobs Act of 2017 (TCJA) doubled the federal gift and estate tax exemption per spouse, allowing a married couple to exempt up to $25.84 million and individuals $12.92 million. However, this exemption amount will expire on December 31, 2025, decreasing by about half.

It’s a “use it or lose it” proposition right now, so taxpayers who want to take advantage of these historically high exemption levels should consider taking action before the expiration date. One way to do that is with a Spousal Lifetime Access Trust.

A SLAT is an irrevocable trust where one spouse gifts assets to the other beneficiary spouse. The beneficiary spouse may receive distributions during their lifetime, while the SLAT is removed from the gross estate and isn’t subject to estate taxes upon the beneficiary’s death. It’s a valuable estate planning tool, as it permits taxpayers to gift assets while retaining limited access to the funds through their spouse.

If a person gifts assets to an irrevocable trust, they can’t take the assets back or change the terms of the trust. Therefore, they’ve given up control over the asset. However, a SLAT provides indirect access through the spouse, who may receive income and principal distributions from the trust during their lifetime.

A SLAT needs to be properly drafted by an experienced estate planning attorney, and they do come with some risks. For example, if the beneficiary spouse passes away suddenly, the spouse may lose access to their SLAT payouts. If the couple divorces, the spouse may lose access to assets, unless the trust includes a provision stating that the trust benefits current and future spouses, which allows indirect access to be regained after remarrying. In addition, assets held in a SLAT don’t receive a step-up in cost basis upon the donor spouse’s death. This might lead to increased capital gains tax liability for remainder beneficiaries.

There are a number of intricacies to consider when using a SLAT as part of your estate plan. To ensure that the SLAT is appropriate, consult an experienced estate planning attorney. If you would like to learn more about trusts, please visit our previous posts.

Reference: The Tennessean (May 7, 2023) “Learn about options for estate planning and wealth transfer”

SLAT is Increasingly Popular for Married Couples

December 12, 2022

The most common estate planning technique used in 2020-2021, according to a recent article from Think Advisor, was the Spousal Lifetime Access Trust (SLAT). The SLAT has become increasingly popular for married couples at or above the current estate planning exemption level, as described in the article “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy.”

SLATs allow couples to move assets out of their estates and, in most cases, out of the reach of both creditors and claimants. Each spouse can still access the assets, making the SLAT a valuable tool for retirement.

In the past, SLATs were not used as often for clients with $1 million to $10 million in net worth. However, the SLAT accomplishes several objectives: optimizing taxes, protecting assets from creditors and addressing concerns related to aging.

Lock in Estate Tax Exemptions Among Uncertainty. SLATs are a good way to secure estate tax exemptions. Various proposals to slash the current estate tax exemptions before the sunset date (see below) makes SLATs an attractive solution.

Potential Restrictions to Grantor Trusts. There has been some talk in Washington and the Treasury about restricting Grantor Trusts. The SLAT eliminates concern about any future changes to these trusts.

Upcoming Change in Estate, Gift and GST Exemptions. When the 2017 tax overhaul expires in 2026, the gift, estate and generation skipping trust exemption will be cut in half. Now is the time to maximize those exemptions.

A Possible Planning Tidal Wave. There may be a big movement to act as 2026 draws closer and SLATs become a tool of choice. Before the wave hits and Congress reacts, it would be better to have assets protected in advance.

SLATs Work Well for Married Couples. Each spouse contributes assets to a SLAT. The other spouse is named as a beneficiary. The assets are removed from the taxable estate, securing the exemption before 2026 and assets are protected from claimants and creditors.

You Might Meet the Estate Tax Threshold in the Future. Even if your current estate doesn’t meet the high threshold of today, if it might reach $6 million in 2026, having a SLAT will add protection for the future.

Income Tax Benefits. A trustee can distribute funds and income to a beneficiary in a no-tax state, saving state tax income tax, or if the trust may be formed in a no-tax state and possibly avoid the grantor’s high home state income tax.

Asset Protection Planning. Many people don’t think about asset protection until it’s too late. By starting now, when assets are below $10 million, the asset protection can grow as wealth grows.

Shrinking the Need for Other Trusts. Depending on their financial situation, a couple may be able to use a SLAT trust and avoid the need for other trusts requiring annual gifts and Crummey powers. The SLAT may also eliminate the need to have a trust for their children.

While SLATs are becoming increasingly popular for married couples, it is important that you speak with your estate planning attorney to learn if a SLAT is appropriate for your family, now and in the near and distant future. These are complex legal instruments, requiring skilled professional help in assessing their value to your estate. If you would like to learn more about SLATs, please visit our previous posts.

Reference: Think Advisor (Nov. 16, 2022) “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy”

Photo by Vlada Karpovich

A second marriage can complicated estate planning

A Second Marriage can complicate Estate Planning

March 29, 2022

In first marriages, working together to raise children can solidify a marriage. However, in a second marriage, the adult children are in a different position altogether. If important estate planning issues are not addressed, the relationship between the siblings and the new spouses can have serious consequences, according to a recent article titled “Into the Breach; Getting Married Again?” from the Pittsburgh Post-Gazette. A second marriage can complicated estate planning.

Chief among the issues center on inheritances and financial matters, especially if one of the parties has the bulk of the income and the assets. How will the household expenses be shared? Should they be divided equally, even if one spouse has a significantly higher income than the other?

Other concerns involve real estate. If both parties own their own homes, in which house will they live? Will the other home be used for rental income or sold? Will both names be on the title for the primary residence?

Planning for incapacity also becomes more complex. If a 90-year-old man marries a 79-year-old woman, will his children or his spouse be named as agents (i.e., attorneys in fact) under his Power of Attorney if he is incapacitated? Who will make healthcare decisions for the 79-year-old spouse—her children or her 90-year-old husband?

There are so many different situations and family dynamics to consider. Will a stepdaughter end up making the decision to withdraw artificial feeding for an elderly stepmother, if the stepmother’s own children cannot be reached in a timely manner? If stepsiblings do not get along and critical decisions need to be made, can they set aside their differences to act in their collective parent’s best interests?

The matter of inheritances for second and subsequent marriages often becomes the pivot point for family discord. If the family has not had an estate plan created with an experienced estate planning attorney who understands the complexities of multiple marriages, then the battles between stepchildren can become nasty and expensive.

Do not discount the impact of the spouses of adult children. If you have a stepchild whose partner feels they have been wronged by the parent, they could bring a world of trouble to an otherwise amicable group.

The attorney may recommend the use of trusts to ensure the assets of the first spouse to die eventually make their way to their own children, while ensuring the surviving spouse has income during their lifetime. There are several trusts designed to accomplish this exact scenario, including one known as SLAT—Spousal Lifetime Access Trust.

Discussions about health care proxies and power of attorney should take place well before they are needed. Ideally, all members of the family can gather peacefully for discussions while their parents are living, to avoid surprises. If the relationships are rocky, a group discussion may not be possible and parents and adult children may need to meet for one-on-one discussions. However, the conversations still need to take place.

A second marriage can complicated estate planning. Second marriages at any age and stage need to have a prenuptial and an estate plan in place before the couple walks down the aisle to say, “I do…again.” If you would like to learn more about blended families and estate planning, please visit our previous posts.

Reference: Pittsburgh Post-Gazette (March 1, 2022) “Into the Breach; Getting Married Again?”

Photo by Trung Nguyen

QTIP Trusts Help avoid Estate Taxes

June 22, 2021

QTIP trusts help avoid estate taxes. Using a QTIP trust allows one spouse to create a trust to benefit the surviving spouse, while providing the surviving spouse with up to nine months to decide how to treat the gift for tax purposes, explains a recent article “How Certain Trusts Soften The Blow Of Estate Tax Increases” from Financial Advisor. This flexibility is just one reason for this trust’s popularity. However, while the QTIP election can be made on the 2021 gift tax return, which is filed in 2022, the choice as to how much of the transfer will be subject to tax can be made in 2022.

The current estate and gift tax exemption of $11.7 per individual is slated to sunset in 2025, but the current legislative mood may curtail that legislation sooner. Right now, flexibility is paramount.

The surviving spouse is named as the primary beneficiary of the trust and must be the only beneficiary of the trust during the lifetime of the surviving spouse, in terms of both receiving income or principal from the trust.

If the decision is made to treat the trust as a QTIP trust for tax purposes, a gift to the trust is eligible for the marital deduction and is not taxable. It does not use up any of the donor’s gift tax exclusion. That flexibility to make a transfer today and decide later whether it uses any lifetime exemption is something most people don’t know about. A QTIP can also protect the recipient spouse and the principal from any creditors.

There are conditions and limitations to this strategy. If the QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. There’s also no flexibility for the trust income to be accumulated or distributed directly to descendants.

The property over which the QTIP election is made is included in the estate of the surviving spouse.

The election can be made over the entire asset or only a portion of the asset transferred to the trust. The option to apply only a portion of the transfer makes it more tax efficient. For generation skipping-trust purposes, an election can be made to use the transferor spouse’s GST exemption when the decision about the QTIP election is made.

QTIPs are not the solution for everyone, but they may be the best option for many people while the people in Washington, D.C. determine the immediate future of the estate tax.

There are many Americans who are moving forward with making gifts using the current gift tax exclusion, using spousal lifetime access trusts (SLATs). However, the QTIP elections remain a way to hedge against the risk of being on the hook for a substantial gift tax, if there is a reduction in the federal estate tax exemptions.

Speak with an estate planning attorney to learn if a QTIP or another type of trust is appropriate for you. QTIP trusts can help avoid estate taxes, but take note that these are complex planning strategies, and they must work in tandem with the rest of your estate plan.

If you are interested in learning more about QTIP trusts, please visit our previous posts.

Reference: Financial Advisor (May 24, 2021) “How Certain Trusts Soften The Blow Of Estate Tax Increases”

Photo by Nataliya Vaitkevich from Pexels

A SLAT allows You to Protect Assets

June 1, 2021

Interest in SLATs, or Spousal Lifetime Access Trusts, has picked up as the new administration eyes possible revenue sources from estate and gift taxes. According to a recent article titled “What Advisors Should Know About SLATs” from U.S. News & World Report, even if no changes to exemption levels happen now, the current federal lifetime gift and estate tax exclusion of $11.7 million will expire in 2026. When that happens, the exemption will revert to the pre-2018 level of about $6 million, adjusted for inflation. First, what is a SLAT? It’s an estate planning strategy where one spouse gifts assets to an irrevocable trust for the benefit of the other spouse. A SLAT allows you to protect assets by removing them from a joint estate, but the donor spouse may still indirectly retain access to the assets. The SLAT typically also benefits a secondary recipient, usually the couple’s children.

It’s important to work with an estate planning attorney who is knowledgeable about this type of planning and tax law to ensure that the SLAT follows all of the rules. It is possible for a SLAT that is poorly created to be rejected by the IRS, so experienced counsel is a must.

The attorney and the couple need to look at how much wealth the family has and how much the family members will need to enjoy their quality of life for the rest of their lives. The funds placed in the SLAT are, ideally, funds that neither of the couple will need to access.

If a donor spouse can be approved for life insurance, that’s a good asset to place inside a SLAT. Tax-deferred assets are also good assets for SLATs. Trust tax rates can be very high. If securities are placed into the trust and they pay dividends, taxes must be paid. When life insurance pays out, the proceeds are estate-tax and income-tax free.

SLATs also protect assets from creditors.

There are pitfalls to SLATs, which is why an experienced estate planning attorney is so important. Married couples with large estates may set up separate SLATs for each other, but they must take into consideration the “reciprocal trust doctrine.” SLATs cannot be funded with identical assets and they cannot be set up at the same time. The IRS will collapse trusts that violate this rule. One SLAT can be done one year, and the second SLAT done the following year, and they should be funded with different assets.

There’s also a trade-off: while the SLAT gets assets out of the estate, they will not receive a step-up in basis at the time of the donor spouse’s death. Basis step-ups occur when the deceased spouse’s share in the cost basis of assets is stepped up to their value on the date of death.

Divorce or the death of the recipient spouse means the donor spouse loses access to the SLAT’s assets.

The SLAT requires coordination between the estate planning attorney and the financial advisor, so anyone considering this strategy should act now so their attorney has enough time to take the family’s entire estate plan into account. There also needs to be a third-party trustee, someone who is not the recipient and not related or subordinate to the recipient.

Assets don’t have to be placed into the SLATs immediately after they are created, so there is time to figure out what the couple wants to put into the SLAT. A SLAT can be beneficial because it allows you to protect assets, however, forgetting to fund the SLAT, like neglecting to fund any other trust, defeats the purpose of the trust.

If you would like to read more about SLATs and other types of tools to protect assets, please visit our previous posts.

Reference: U.S. News & World Report (May 3, 2021) “What Advisors Should Know About SLATs”

Strategies to Reduce Estate Taxes

May 20, 2021

If the federal estate tax exemption is lowered, as is expected, it could go as low as $3 million, reports the article “How Trusts Can Be Used To Counter Tougher Estate Taxes” from Financial Advisor. For Americans who own a home and robust retirement accounts, this change presents an estate planning challenge—but one with several solutions. Trusts, giving and updating estate plans or creating wholly new estate plans should be addressed in the near future. There are strategies to reduce estate taxes.

Not that these topics aren’t challenging for most people. Confronting the future, including death and incapacity, is difficult. Adult children and their parents may find it hard to talk about these matters; emotions, death and money are tough to talk about on their own, but estate planning includes conversations around all three.

Once those hurdles are overcome, an unemotional approach to the business of estate planning can accomplish a great deal, especially when guided by an experienced estate planning attorney. Here are a few suggestions for families to consider.

Estate and gift planning strategies to reduce or avoid estate taxes include Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs). A SLAT is an irrevocable trust created when one spouse (the donor spouse) makes a gift into a trust to benefit their spouse (the beneficiary spouse), while retaining limited access to the assets at the same time they remove the asset from their combined estate. One spouse is permitted to indirectly benefit, as long as the couple remains married.

The indirect access disappears, if the spouses divorce or if the beneficiary spouse dies before the donor spouse. Be careful about creating SLATs for both spouses; the IRS does not like to see SLATs with the same date of origin and the same amount for both spouses.

The GRAT and sales to an Intentionally Defective Trust (IDGT) are useful tools in a low-interest rate environment. For a GRAT, property is transferred to a trust in exchange for an annual fixed payment. A sale to an IDGT is where property is sold to a trust in exchange for a balloon note.

Gifting is an important part of estate planning at any asset level. For 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. The simple strategy of aggressive lifetime gifting using that $15,000 exclusion is a good way to get money out of a taxable estate.

Protect the estate plan by reviewing it every four or five years, and sooner if there are large changes to the tax law—which is coming soon—and changes in the family’s circumstances.

Thoughtful use of trusts and gifting strategies can avoid the probate of the will and reduce estate taxes, ensuring that assets go directly to heirs. Reviewing the estate plan regularly with an eye to changes in tax law will protect the legacy. If you would like to learn more about estate tax strategies, please visit our previous posts.

Reference: Financial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”

revise your planning with a second marriage

Is a SLAT right for your Family?

March 16, 2021

A SLAT is a type of irrevocable trust that can only be used by married couples for the benefit of a spouse, children, or other beneficiaries. Is a SLAT right for your family? The recent article titled “Should a SLAT Be Part Of Your Estate Planning?” from Forbes examines when a SLAT works for a family, and when it doesn’t.

A SLAT works well while your spouse is alive. They have access to it and the assets it contains, since they are the beneficiary. As of this writing, up to $11,700,000 of assets can be removed from a taxable estate using your federal estate tax exemption, while your spouse continues to have access to the assets.

Sounds like a win-win, doesn’t it? However, there are drawbacks. If your spouse dies, you lose access to the assets. They will pass to the remainder beneficiaries in the trust, typically children, but they can be other beneficiaries of your choice.

If you and your spouse divorce, the spouse is still a beneficiary of the SLAT. Ask your estate planning attorney if this is something they can build into the SLAT for your family, but be mindful that if the attorney is representing both spouses for estate planning, there will be ethical considerations that could get tricky.

What about a SLAT for each spouse? If you and your spouse both establish SLATs to benefit each other, you run the risk of the “reciprocal trust doctrine.” The IRS could take the position that the trusts cancel each other out, and rule that the only reason for the SLAT was to remove taxable assets from your estate.

The SLATs need to be different from each other in more than a few ways. Your estate planning attorney will need to develop this with you. A few ways to structure two SLATs:

Create them at different times. The more time between their creation, the better.
Consider establishing the trusts in different states.
Have different trustees.
Vary the distribution rules for the surviving spouse and the distribution rules upon the death of the second spouse. For instance, one spouse’s trust could hold the assets in lifetime trusts for the children, while the other spouse’s trust could terminate, and assets be distributed to the children when they reach age 40.

So is a SLAT right for your family? The SLAT is an especially useful way to address tax liability. If you have not maxed out lifetime gifts in 2020, now is the time to start this process. December 2025, when the federal estate tax exemption reverts back to $5 million, will be here faster than you think. If the country needs to find revenue quickly, that change may come even sooner. Tax reform that occurs in 2021 is not likely to be retroactive to January 1, 2021, but there are no guarantees.

If you would like to learn more about estate strategies such as a SLAT, please visit our previous posts.

Reference: Forbes (Feb. 16, 2021) “Should a SLAT Be Part Of Your Estate Planning?”

Category: SLAT

Intricacies to Consider when using a SLAT

SLAT is Increasingly Popular for Married Couples

A Second Marriage can complicate Estate Planning

QTIP Trusts Help avoid Estate Taxes

A SLAT allows You to Protect Assets

Strategies to Reduce Estate Taxes

Is a SLAT right for your Family?

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