| If you have discussed estate tax-saving tools with your attorney or financial team, chances are you might have come across the Spousal Lifetime Access Trust (SLAT). A SLAT is a powerful tool that can help protect assets and minimize estate taxes for your loved ones. Often a Spousal Lifetime Access Trust (SLAT) offers a way for married couples to “have their cake and eat it too.” What is a Spousal Lifetime Access Trust? A SLAT is a type of irrevocable Trust created by one spouse (the “Trustmaker spouse”) for the benefit of the other spouse (the “beneficiary spouse”) that is 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 (ideally more than $7,000,000 and as much as $13,000,000) to the SLAT that then decreases the value of their estate by that amount + any appreciation of the asset, while maintaining some limited access to the money and property that is gifted for the beneficiary spouse’s benefit. Here’s how it works: The Trustmaker spouse creates a SLAT, making their spouse the beneficiary. Then the Trustmaker spouse gifts property to the SLAT. 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 then 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. However, on 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. By gifting money or property to the SLAT, the value of the Trustmaker spouse’s estate is reduced, and all future appreciation is removed from the estate. Since it’s usually created to be a “Grantor Trust”, all taxable income may be taxed to the Trustmaker, further reducing the estate. What are the Potential Drawbacks to a SLAT? SLATs are ideally suited for established couples with a solid marital relationship because the drawbacks to a SLAT must be considered. -Gifts to a SLAT are final and cannot be undone. -If the beneficiary spouse dies before the Trustmaker spouse, access to the SLAT assets is typically no longer available to the Trustmaker spouse. Although the assets also typically go to the couple’s children or other named beneficiaries, income and use of the assets is lost to the Trustmaker spouse. -Similarly, if the spouses divorce, access to the SLAT assets is typically lost to the Trustmaker spouse. -The property gifted to a SLAT will not receive a step up in cost basis at the death of the Trustmaker spouse. -A SLAT often takes as many as 2 years to complete in it’s entirety. There are several legal considerations including, but not limited to, the step transaction doctrine and reciprocal trust doctrine that the IRS may use to cause estate tax inclusion if you are audited that need to be carefully avoided. Not a drawback necessarily but to help ensure proper administration and estate tax exclusion, many clients may feel more comfortable having a professional trustee or advisor involved in the management of the trust which adds additional costs and administrative issues. Upside to Consider? However, the upside to using a SLAT is, if both spouses choose to use their own lifetime exemption, they can still continue to enjoy the entirety of their assets during their lifetime while keeping them protected. While the Trustmaker spouse loses direct access to the assets owned by the Trust, they can still maintain some limited access to the money and property through their spouse. Why the Hype? In 2023, the gift and estate tax exemption amount is $12.92 million for individuals and $25.84 million for married couples—a historic high. However, under current law, this amount is slated to “sunset” to $5 million each or $10 million per couple (adjusted for inflation) on January 1, 2026. Let’s use an example to illustrate: Clients have an estate worth $40 million, primarily invested in Austin real estate. If clients die before the scheduled sunset January 1, 2026 then they will pay estate tax on the difference between $40 million and $25.84 million, approximately $14.16 million. The current estate tax rate is 40% so tax on $14.16 million is $5.66 million. If Clients die after 2026 then they will pay estate tax on the difference between $40 million and $10 million (adjusted for inflation), approximately $30 million. The current estate tax rate is 40% so tax on $30 million is $12 million. A difference of over $6 million to the IRS. If Clients have utilized the SLAT strategy and fully fund the SLAT in 2023, they preserve the $25.84 million estate tax “exemption” amount regardless of the “sunset”, so death after 2026 would still utilize the 2023 exemption amount and the $6 million dollar savings in tax! There is a limited “window” of opportunity until “sunset”, so it’s even more critical to take advantage of estate planning techniques like the SLAT while you can. But in order to determine if the SLAT the right solution for you and your spouse, contact your attorney at Thrash, Carroll & Vanway Law Group today. |
