Married Americans may be able to use a SLAT in their estate planning.
Estate taxes allow the government to take a portion of what people own when they die.
Some people will only be impacted by this at the federal level.
Others will owe money to both federal and state governments, if the latter imposes its own estate tax.
Still others may own assets under the “applicable” federal exemption threshold and avoid this tax altogether.
According to a recent U.S. News & World Report article titled “What Advisors Should Know About SLATs,” more people may soon be subject to the federal estate tax than those in recent years.
The current gift and estate tax basic exclusion amount is $11.7 million for an individual and is set to expire in 2026.
At this time, it is schedule to revert to about $6 million.
This is the pre-2019 level adjusted for inflation.
Under the current administration, this reverting could occur far sooner.
For those who will move into the federal estate tax bracket, a SLAT can be helpful.
What is a SLAT?
A SLAT is a Spousal Limited Access Trust.
This trust allows one spouse to set up and fund an irrevocable trust to be used for the benefit of the other spouse.
What does this do?
First, it removes assets from the joint estate of the couple.
Second, it allows the spouse who donated the assets to still have “indirect access” to the assets while alive.
The children of the couple often indirectly benefit from the trust, too.
Many rules govern the creation and functioning of a SLAT.
For this reason, it is essential to work with an experienced estate planning attorney.
If the trust is constructed poorly, the IRS may reject the trust.
When creating and funding the trust, couples should consider how much money they will need to sustain the quality of their lives until they die.
The funds placed in the SLAT should be those the couple will not need to access.
What kind of assets are good for funding a SLAT?
Adding life insurance to the SLAT can be a great option.
When the policy is paid out the proceeds will be free from income and estate taxes (especially it is a new policy acquired by the Trustee of the SLAT itself and not an existing policy subject to the three year rule).
Tax-deferred assets may be good for SLATs, but tax rates must be considered.
If creditors are a concern, a SLAT can provide protection for certain assets.
Can both spouses create a SLAT?
Spouses cannot create an identical SLAT for one another at the same time and with identical assets.
Doing so will violate the “reciprocal” trust doctrine.
If the SLATs are made at significantly different times, funded with significantly different assets, and with significantly different terms, then each spouse may be able to each have a separate SLAT.
There are downsides to SLATs as well.
What are they?
Assets placed in the trust will not receive a step-up in basis at the death of the donor spouse.
Also, the donor spouse will lose access to the assets held in the SLAT if the couple divorces.
Other things to consider with these trusts, include appointing a third-party trustee.
Work closely with your estate planning attorney, financial advisor, and CPA to ensure your overall estate planning objectives are consistent with the use of SLAT planning.
Reference: U.S. News & World Report (May 3, 2021) “What Advisors Should Know About SLATs”