Spousal Lifetime Access Trusts (SLATs)
| Overview When you give assets to someone during your lifetime or through your estate, the gifts are subject to gift and estate taxes. Fortunately, current laws provide for a large gift and estate tax exemption—an amount you can give before you face any tax liability. In 2018, the Tax Cuts and Jobs Act more than doubled this exemption from $5.49 million dollars to $11.18 million dollars. Today, the exemption amount has been adjusted to $11.7 million dollars. Therefore, an individual can gift $11.7 million dollars before facing any federal gift or estate tax. Unfortunately for some, the current exemption will expire on December 31, 2025, and the exemption amount will return to $5 million dollars adjusted for inflation. Additionally, many professionals believe that Congress will lower the exemption amount consistent with the Biden Administration’s proposals ($3 to $3.5 million dollars for estate tax and $1 million dollars for gift tax). Although the gift and estate tax exemption is set to decrease, there is a way individuals can lock in the current exemption amount of $11.7 million dollars. To take advantage of the current exemption amount and secure substantial tax savings, many families are creating Spousal Lifetime Access Trusts (SLATs). What is SLAT and what does it achieve?  A SLAT is an irrevocable trust that an individual (the “donor”) funds for the benefit of his/her spouse. The donor’s children and grandchildren may also be named as beneficiaries. The donor uses a portion of his/her combined gift and estate tax exemption to transfer assets to the SLAT. Once the donor has transferred assets to the SLAT, the assets will be removed from the donor’s estate. The donor and his/her estate will face no further gift or estate taxes on transferred assets. Therefore, a SLAT allows the donor to gift up to $11.7 million dollars in assets to his/her spouse, children, and grandchildren in trust and tax free. Additionally, any appreciation on the transferred assets will not be taxable to the donor’s estate. For some clients, a SLAT will save millions of dollars in taxes. A SLAT also offers creditor protection. When a donor transfers assets to a SLAT, the assets are protected from claims against the donor. Additionally, a SLAT will protect undistributed assets held in trust from claims against the spouse and other beneficiaries. How Does a SLAT Benefit the Donor’s Spouse and Descendants? The trustee(s) of a SLAT (which can include the donor’s spouse) will make distributions from the trust fund to the donor’s spouse and descendants. The trustee can also acquire and hold assets, such as a vacation home, for the beneficiaries. The donor can continue to make gifts to the SLAT in future years. After the donor and his/her spouse have passed away, the trust fund will be distributed as directed by the donor and often this is to separate trusts for the donor’s descendants. The trustee(s) of each descendant’s trust (which can include the descendants) will make distributions from the trust fund to the descendant beneficiary. In sum, the donor’s spouse and descendants will receive funds as appropriate throughout their lives. While the donor and his/her spouse are married, the donor may indirectly benefit from the spouse’s use of the trust fund. Why act now? Current tax laws will not exist forever. In fact, 2021 may be the last year to take advantage of the $11.7 million dollar exemption. A SLAT can lock in the current exemption, pass substantial wealth to loved ones tax free, and protect assets from creditors. |
*Intended as general guidance only and not as legal advice.