Transferring your legacy
Should a SLAT be a part of your estate planning?
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 an irrevocable trust that you create for the benefit of your spouse. It is also often used to benefit your children or other beneficiaries. Once you create the SLAT, you can make a gift to it of all or a portion of your estate tax lifetime exemption.
Your spouse has access to the trust during his or her lifetime as a beneficiary. This allows you to have your cake and eat it, too. You remove up to $11,700,000 worth of assets from your taxable estate by using up your federal estate tax exemption amount (which is scheduled to drop to $5 million, adjusted for inflation, on December 31, 2025). But your spouse still has access to the assets.
What are the drawbacks? First, if your spouse dies, you no longer have access to the assets. They will pass to the remainder beneficiaries named in the trust. That is typically your children but can be other beneficiaries as well. Second, if you and your spouse divorce, your spouse is still a beneficiary of the trust. Some attorneys will draft SLAT’s to take into account divorce; however, if the attorney is representing both spouses for the estate planning this can be problematic.
Should you and your spouse each create a trust? You can each create a SLAT for the benefit of the other. However, you need to be careful that the trusts are not identical. If the trusts are too similar, they may run afoul of what is known as the reciprocal trust doctrine. In this scenario, the IRS can take the position that the trusts cancel each other out, and rule that you each essentially created a trust for your own benefit. This would negate your tax planning.
Your attorney can advise you of how the trusts should best be structured to avoid this added scrutiny by the IRS. Some ways to differentiate the trusts include:
If you did not max out your lifetime gifts in 2020, consider doing it now. December 31, 2025, when the federal exclusion for SLATs is set to expire. However, tax reform does come in 2021, many tax professionals think it will happen toward the end of the year and be effective in 2022. Before the exemption drops, consider the use of a SLAT to maximize your estate tax planning.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.