With continuing uncertainty regarding the federal estate tax laws, the Spousal Lifetime Access Trust (SLAT) is a popular option that helps high net-worth individuals maintain flexibility while maximizing their financial planning.
A SLAT is an irrevocable trust created by one spouse (the grantor) to benefit the other spouse (the beneficiary). The primary advantage of a SLAT is that it removes assets from the grantor’s taxable estate while still allowing indirect access to those assets through the beneficiary spouse. Once the SLAT is funded, the beneficiary spouse may request distributions of principal or income for his or her benefit, which can then, of course, provide an indirect benefit to the grantor spouse.
In this blog, we’ll explore why these trusts have become a preferred estate planning strategy and why you might want to consider one.
What are the key benefits of a SLAT?
SLATs offer a number of benefits that make them attractive.
By transferring assets into a SLAT, grantors may be able to reduce or eliminate estate taxes upon their death. Using a SLAT allows the grantor to use some or all of their lifetime gift tax exemption which, for 2024, is $13.61 million each. This consideration is important for high-net-worth individuals facing substantial estate tax liabilities since the estate tax rate is 40%. Further, once the assets are out of the grantor’s estate, any appreciation of assets in the trust also occurs outside of the grantor’s taxable estate, which can significantly enhance the long-term financial legacy for the grantor’s heirs.
Since a SLAT is an irrevocable trust, assets in SLATs are also generally protected from the grantor’s creditors. This protection can be valuable for individuals in professions or situations where they may be at higher risk of legal claims.
Finally, SLATs afford grantors greater flexibility. While a grantor cannot directly access the assets in the trust, the beneficiary spouse can receive distributions from the trust, so the couple still has access to the assets.
Why are SLATs increasing in popularity?
With the aging population and a significant transfer of wealth expected in the coming decades, many families are prioritizing estate planning. SLATs offer a strategic way to manage this transfer, ensuring that assets are protected and efficiently passed on to future generations — especially in today’s political and economic cli
There is ongoing uncertainty regarding future changes to the Internal Revenue Code, particularly concerning estate and gift taxes. For example, the 2017 Tax Cuts and Jobs Act is set to expire, or “sunset,” at the end of 2025. If that happens, the current $13.61 million individual exemption amount would likely be cut in half, to about $6.5 million. Beyond this “sunsetting” provision, there are also other potential legislative changes that could lower the lifetime gift tax exemption or increase estate tax rates. For those reasons many individuals are looking to lock in current tax benefits. If the SLAT is formed and funded before the law changes, the IRS has already stated that grantors will get the full benefit of their higher exemption amount transferred into a SLAT. This truly makes it a “use or lose” benefit if the law does change in the future.
Financial flexibility is essential in an unpredictable economic environment. SLATs provide a unique balance, allowing individuals to transfer assets out of their estate while still retaining indirect access through their spouse. This approach appeals to those who want to secure their financial future without feeling entirely disconnected from their assets. SLATs can also be designed to take advantage of the generation-skipping transfer tax exemption, allowing assets to benefit multiple generations without incurring additional transfer taxes.
What is the best way to design an effective SLAT?
To maximize the benefits of a SLAT, it is crucial to work with an experienced estate planning attorney who can tailor the trust to your specific needs and circumstances.
Key aspects of setting up a SLAT include these:
- Selecting the right trustee: The trustee manages trust assets and makes distribution decisions. Choose a trustee who understands the grantor’s objectives and can effectively manage the trust. In many cases a professional or independent trustee is a better option that having the beneficiary spouse serve as the trustee for greater flexibility of trust, among other reasons.
- Funding the trust: Deciding which assets to transfer into the SLAT is critical. Typically, high-growth assets are preferred to maximize the appreciation outside the taxable estate.
- Defining distribution terms: The trust document should clearly outline the terms under which the beneficiary spouse can receive distributions.
Keep in mind that state law can impact the effectiveness and administration of a SLAT. An experienced attorney can ensure that the trust complies with all relevant requirements.
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