A SLAT is a type of irrevocable trust used for moving significant well-earned assets outside of one’s taxable estate to a spouse and/or descendants, thereby reducing tax liability. Many people find that the most attractive feature of a SLAT is the continued accessibility to the assets with which it is funded. A SLAT allows indirect access to the trust assets delegated to a spouse for the remainder of that spouse’s life, provided they remain married to the donor.
When should I set up a SLAT?
Truthfully, the best time to use this technique is right now. In anticipation of the 2020 presidential election, and in the months immediately after, there was a surge in the use of this type of planning. The primary reason for this involves the federal lifetime gift exemption. In 2021, the lifetime gift exemption amount is $11,700,000 (or $23,400,000 for a married couple). This means that an individual can make lifetime gifts, or after death, pass on $11,700,000 tax-free to their heirs. Every dollar above this amount is currently taxed at 40%. Under current law, this exemption will revert to the 2017 amount of $5,490,000 indexed for inflation beginning January 1, 2026. Under President Biden, many planners expect this amount to be reduced even further and be written into law before the end of 2021.
This is why NOW is the time to set up a SLAT given the limited time available with the current generous exemption; there is no time in the foreseeable future where this technique will be as rewarding.
Can both spouses set up a SLAT?
One may choose to set up a SLAT for their spouse, or in some cases, a similar SLAT can be structured so that each spouse can have access to the transferred assets as beneficiaries. However, the SLATs must be carefully set up, for example, the use of different independent trustees and different dispositive provisions to avoid triggering the “reciprocal trust” doctrine, which can cause the SLATs to become taxable by the IRS in the original donor’s estate.
How much is needed to fund a SLAT?
Every estate is different, and your estate planner will consider your existing planning and other planning techniques to guide you in funding the SLAT appropriately. Like other irrevocable trusts, a SLAT can be funded with a variety of assets. Using highly appreciable assets with a low-cost basis to fund the SLAT can prove to be particularly beneficial as any growth will not be countable in one’s estate. Care must be taken to only transfer assets owned by the donor spouse (not assets owned jointly by both spouses) so that the gift is not treated as made by both spouses, which would negate the benefits of the SLAT. In community property states, this may require additional documentation and transfers. A SLAT is effective in reducing state estate tax exposure. Funding a SLAT may be a viable strategy for individuals who reside in states with a state estate tax. These individuals may benefit by removing assets from their taxable estate (at the state level), even if they are not expected to be subject to federal estate tax.
What are the benefits of using a SLAT in my estate planning?
- A SLAT is beneficial if you have a taxable estate or an estate that would or could become taxable in the foreseeable future.
- A SLAT is beneficial if you want to reduce your estate tax liability but retain access to and control your assets.
- A SLAT is beneficial for multi-generational planning or structured as a Dynasty Trust (a long-term trust that passes assets from generation to generation without the burden of transfer taxes).
How is a SLAT structured?
A SLAT is typically structured as a grantor trust for federal income tax purposes. The donor pays the income tax personally on the earnings generated in the trust, rather than having income taxes paid from the trust. Due to this structure, yearly trust tax returns are not required while the donor spouse is living. A separate income tax return is necessary if the SLAT is not structured as a grantor trust. The transfer of property to the SLAT necessitates reporting the transfer on a gift tax return in the year that the gift is made.
How do I set up a SLAT?
A SLAT is an excellent estate planning tool best handled by an experienced Generational Strategies Estate Planning professional who keeps abreast of evolving tax laws. Intricate questions such as how much and what kind of assets should be used to fund the SLAT are explored and the risks and rewards assessed.