Spousal Lifetime Access Trusts (SLATs): How Married Couples Can Have Their Cake And Eat It, Too.

The federal estate tax exemption has never been higher than it is today. It is currently set at $11.70 million per person (married couples can have a combined exemption of $23.40 million), which means that a person can gift that amount, either during their life or at their death, without paying estate or gift taxes.

However, while the exemption is at an all-time high, it probably will not last. It is set to “sunset” on December 31, 2025 and return down to roughly $5.5 million. It is also possible that the current administration will decrease the exemption further to somewhere around $3.5 million. To add salt to the wound, not only could the exemptions reduce to lower amounts, but the tax rate, which is currently 40%, could increase.

There is some silver lining, however. The current environment presents a unique “use it or lose it” planning strategy, because the IRS has stated that if exemption amounts are reduced in the future, it will not attempt to claw-back amounts that were used when the exemption amounts were at their peak. In other words, gifts made under today’s rules will not be subject to estate taxes in the future if the exemptions are reduced. For that reason, we are encouraging clients to consider certain estate planning strategies today to preserve the higher amounts.
A popular estate planning strategy for married couples to take advantage of the “use it or lose it” exemption is the Spousal Lifetime Access Trust (SLAT).

Generally, when establishing trusts for your children and grandchildren, you must surrender your interest in the assets you give to the trust. However, a SLAT allows you to indirectly access these trust assets. Why? Because in addition to your descendants being beneficiaries, your spouse is also a beneficiary of the SLAT. Practically, you have access to the assets through your spouse. If your spouse passes away before you, then the assets will typically flow to you through a separate “Family Trust.”

In 2021, assuming you have never made a taxable gift during your lifetime, you can transfer up to $11.70 million in assets into your own SLAT, where the assets will grow and appreciate outside of the estate tax system, potentially forever. Moreover, both spouses can create a SLAT, thereby using their combined exemptions to shelter up to $23.40 million in assets from gift and estate taxes.

Currently, there is little downside to creating a SLAT, especially with potential estate and gift tax law changes on the horizon. However, there are areas that you should address with your estate planning attorney, financial advisor, and CPA, before making a final decision on the SLAT. For example, assets in the SLAT will not obtain a “step-up” in income tax basis upon either spouse’s death, although, the SLAT’s terms can allow for the power to substitute or swap assets of equal value with the SLAT, providing beneficial income tax treatment when the assets are liquidated or sold by the SLAT beneficiaries. Your estate planning attorney can provide such powers in the SLAT. Additionally, spouses looking to create SLATs should keep in mind the “reciprocal trust doctrine,” which, prevents couples from creating trusts that mirror one another. Experienced estate planning attorneys can help you avoid these pitfalls.

If you would like to know more about SLATs or other estate planning strategies, please contact Strauss Attorneys and we can discuss your options.