No one wants to pay more taxes than they have to.
That's why many people search for the perfect estate planning tool that will allow them to control as much of their money and property as possible while reducing the amount they or their loved ones will have to pay the government. If you've looked for the tax-saving estate planning tools, you might have come across the spousal lifetime access trust (SLAT). Before settling on this tool as your estate planning solution, you should know some essential things.
What is a spousal lifetime access trust?
A SLAT is a type of irrevocable trust created by one spouse (trustmaker spouse) for the benefit of the other spouse (beneficiary spouse) used to transfer money and property out of the trustmaker spouse's estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts by having the trustmaker spouse make sizable, permanent gifts to the SLAT that decreases the value of their estate while maintaining some limited access to the money and property that is gifted for the beneficiary spouse's benefit.
How does it work?
The trustmaker spouse gifts money or property (of which they are the sole owner) to the SLAT to benefit the beneficiary spouse. If the couple resides in a community property state, they will likely need to convert community property into separate property through a partition agreement. The trustmaker spouse reports the gift on a gift tax return. The beneficiary spouse can receive distributions from the trust, from which the trustmaker spouse may also indirectly benefit. Upon the death of the beneficiary spouse, the trust assets are transferred to the remaining trust beneficiaries (usually children and grandchildren of the couple), either outright or in trust.
What are the pros and cons?
SLATs offer several advantages to those looking to minimize the value of their estate:
Not only is the value of the property gifted to a SLAT removed from the trustmaker spouse's estate, but all future appreciation is also removed. The trust property is also excluded from the beneficiary spouse's estate, even though the beneficiary spouse may receive distributions from the SLAT.
SLATs are typically structured as grantor trusts, meaning that all the trust's taxable income is taxed to the trustmaker spouse, further reducing the trustmaker spouse's estate. Plus, no separate trust tax return will be required for the SLAT while the trustmaker spouse is living. However, if the SLAT is not structured as a grantor trust, a separate trust tax return will be required.
SLATs provide a way to "have your cake and eat it too." While spouses may be concerned about losing control over money and property gifted away and whether that property will be needed in the future, a SLAT can address this uncertainty by allowing the trustmaker spouse indirect access to the property through the beneficiary spouse.
Some potential drawbacks to using a SLAT are as follows:
Gifts made to a SLAT are final and cannot be undone.
If the beneficiary spouse dies before the trustmaker spouse, the trustmaker spouse loses all access to the money and property gifted to the SLAT. This would also be the case if the couple were to divorce. The trustmaker could regain indirect access to the trust assets by remarrying.
The property gifted to a SLAT will not receive a step up in cost basis at the death of the trustmaker spouse. This drawback could be minimized by including a trust provision that allows the trustmaker spouse to swap trust property, thus allowing the trustmaker spouse to substitute low-basis property with high-basis property or cash of equal value.
Spouses looking to create SLATs for each other to utilize each spouse's exemption amount fully will need to ensure they stay within the reciprocal trust doctrine. Suppose the Internal Revenue Service interprets the two trusts as being substantially similar. In that case, it can undo them and include the trust property in the spouses' taxable estates, thus defeating the purpose of creating the SLAT. This drawback can be avoided by making the SLATs at different times, using different trustees, choosing different beneficiaries, or providing for different terms for distributions. Given the complexity and tax implications, it is highly recommended that you consult an experienced estate planning attorney.
Why are people talking about them so much?
In 2022, the gift and estate tax exemption amount is $12.06 million for individuals and $24.12 million for married couples—a historically high amount. However, under current law, this amount is slated to shrink to $5 million (adjusted for inflation) on January 1, 2026. This decrease in the exemption amount could happen even sooner if Congress acts to change it. Last year, the House Ways and Means Committee proposed cutting the gift and estate tax exemption in half, effective January 1, 2022. Because the law could change at any time, the window of opportunity to take advantage of this estate planning technique is very narrow.
Married couples considering taking such a step should contact an estate planning expert as soon as possible. We can help you with the pros and cons of using a SLAT and whether this technique makes sense for your situation. Call Santaella Legal Group, serving all of California, at (925) 831-4840.
Read more:
Estate Planning is Crucial for Unmarried Partners
What’s the Difference Between a Prenup and a Will or Trust? How Do I Know Which One I Need?
Here's How Divorce and Remarriage Can Affect Your Estate Plan
Estate Planning Questions to Consider for Couples With an Age Gap