If you have been thinking about making large gifts to take advantage of the current $11,700,000 lifetime federal estate tax exemption, you have probably been contemplating a spousal lifetime access trust, commonly known as a SLAT.”
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, 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 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.
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.
Reference: Forbes (Feb. 16, 2021) “Should a SLAT Be Part Of Your Estate Planning?”