What Does SLAT Mean in Estate Planning?

What Does SLAT Mean in Estate Planning?

Interest in SLATs, or Spousal Lifetime Access Trusts, has picked up as the new administration eyes possible revenue sources from estate and gift taxes. According to a recent article titled “What Advisors Should Know About SLATs” from U.S. News & World Report, even if no changes to exemption levels happen now, the current federal lifetime gift and estate tax exclusion of $11.7 million will expire in 2026. When that happens, the exemption will revert to the pre-2018 level of about $6 million, adjusted for inflation.

First, what is a SLAT? It’s an estate planning strategy where one spouse gifts assets to an irrevocable trust for the benefit of the other spouse. This removes the asset from their joint estate, but the donor spouse may still indirectly retain access to the assets. The SLAT typically also benefits a secondary recipient, usually the couple’s children.

It’s important to work with an estate planning attorney who is knowledgeable about this type of planning and tax law to ensure that the SLAT follows all of the rules. It is possible for a SLAT that is poorly created to be rejected by the IRS, so experienced counsel is a must.

The attorney and the couple need to look at how much wealth the family has and how much the family members will need to enjoy their quality of life for the rest of their lives. The funds placed in the SLAT are, ideally, funds that neither of the couple will need to access.

If a donor spouse can be approved for life insurance, that’s a good asset to place inside a SLAT. Tax-deferred assets are also good assets for SLATs. Trust tax rates can be very high. If securities are placed into the trust and they pay dividends, taxes must be paid. When life insurance pays out, the proceeds are estate-tax and income-tax free.

SLATs also protect assets from creditors.

There are pitfalls to SLATs, which is why an experienced estate planning attorney is so important. Married couples with large estates may set up separate SLATs for each other, but they must take into consideration the “reciprocal trust doctrine.” SLATs cannot be funded with identical assets and they cannot be set up at the same time. The IRS will collapse trusts that violate this rule. One SLAT can be done one year, and the second SLAT done the following year, and they should be funded with different assets.

There’s also a trade-off: while the SLAT gets assets out of the estate, they will not receive a step-up in basis at the time of the donor spouse’s death. Basis step-ups occur when the deceased spouse’s share in the cost basis of assets is stepped up to their value on the date of death.

Divorce or the death of the recipient spouse means the donor spouse loses access to the SLAT’s assets.

The SLAT requires coordination between the estate planning attorney and the financial advisor, so anyone considering this strategy should act now so their attorney has enough time to take the family’s entire estate plan into account. There also needs to be a third-party trustee, someone who is not the recipient and not related or subordinate to the recipient.

Assets don’t have to be placed into the SLATs immediately after they are created, so there is time to figure out what the couple wants to put into the SLAT. However, forgetting to fund the SLAT, like neglecting to fund any other trust, defeats the purpose of the trust.

Reference: U.S. News & World Report (May 3, 2021) “What Advisors Should Know About SLATs”

Can Estate Taxes Be Avoided with a Trust?

Can Estate Taxes Be Avoided with a Trust?

If the federal estate tax exemption is lowered, as is expected, it could go as low as $3 million, reports the article “How Trusts Can Be Used To Counter Tougher Estate Taxes” from Financial Advisor. For Americans who own a home and robust retirement accounts, this change presents an estate planning challenge—but one with several solutions. Trusts, giving and updating estate plans or creating wholly new estate plans should be addressed in the near future.

Not that these topics aren’t challenging for most people. Confronting the future, including death and incapacity, is difficult. Adult children and their parents may find it hard to talk about these matters; emotions, death and money are tough to talk about on their own, but estate planning includes conversations around all three.

Once those hurdles are overcome, an unemotional approach to the business of estate planning can accomplish a great deal, especially when guided by an experienced estate planning attorney. Here are a few suggestions for families to consider.

Estate and gift planning techniques include Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs). A SLAT is an irrevocable trust created when one spouse (the donor spouse) makes a gift into a trust to benefit their spouse (the beneficiary spouse), while retaining limited access to the assets at the same time they remove the asset from their combined estate. One spouse is permitted to indirectly benefit, as long as the couple remains married.

The indirect access disappears, if the spouses divorce or if the beneficiary spouse dies before the donor spouse. Be careful about creating SLATs for both spouses; the IRS does not like to see SLATs with the same date of origin and the same amount for both spouses.

The GRAT and sales to an Intentionally Defective Trust (IDGT) are useful tools in a low-interest rate environment. For a GRAT, property is transferred to a trust in exchange for an annual fixed payment. A sale to an IDGT is where property is sold to a trust in exchange for a balloon note.

Gifting is an important part of estate planning at any asset level. For 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. The simple strategy of aggressive lifetime gifting using that $15,000 exclusion is a good way to get money out of a taxable estate.

Protect the estate plan by reviewing it every four or five years, and sooner if there are large changes to the tax law—which is coming soon—and changes in the family’s circumstances.

Thoughtful use of trusts and gifting strategies can avoid the probate of the will and ensure that assets go directly to heirs. Reviewing the estate plan regularly with an eye to changes in tax law will protect the legacy.

Reference: Financial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”

Your Estate Planning Checklist for 2021

Your Estate Planning Checklist for 2021

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you’re not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That’s the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you’ll need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be way more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you’ve purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you didn’t do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”