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”

What Is a SLAT in Estate Planning?

A SLAT is a type of irrevocable trust that can only be used by married couples for the benefit of a spouse, children, or other beneficiaries. Is a SLAT right for your family? The recent article titled “Should a SLAT Be Part Of Your Estate Planning?” from Forbes examines when a SLAT works, and when it doesn’t.

A SLAT works well while your spouse is alive. They have access to it and the assets it contains, since they are the beneficiary. As of this writing, up to $11,700,000 of assets can be removed from a taxable estate using your federal estate tax exemption, while your spouse continues to have access to the assets.

Sounds like a win-win, doesn’t it? However, there are drawbacks. If your spouse dies, you lose access to the assets. They will pass to the remainder beneficiaries in the trust, typically children, but they can be other beneficiaries of your choice.

If you and your spouse divorce, the spouse is still a beneficiary of the SLAT. Ask your estate planning attorney if this is something they can build into the SLAT but be mindful that if the attorney is representing both spouses for estate planning, there will be ethical considerations that could get tricky.

What about a SLAT for each spouse? If you and your spouse both establish SLATs to benefit each other, you run the risk of the “reciprocal trust doctrine.” The IRS could take the position that the trusts cancel each other out, and rule that the only reason for the SLAT was to remove taxable assets from your estate.

The SLATs need to be different from each other in more than a few ways. Your estate planning attorney will need to develop this with you. A few ways to structure two SLATs:

  • Create them at different times. The more time between their creation, the better.
  • Consider establishing the trusts in different states.
  • Have different trustees.
  • Vary the distribution rules for the surviving spouse and the distribution rules upon the death of the second spouse. For instance, one spouse’s trust could hold the assets in lifetime trusts for the children, while the other spouse’s trust could terminate, and assets be distributed to the children when they reach age 40.

The SLAT is an especially useful way to address tax liability. If you have not maxed out lifetime gifts in 2020, now is the time to start this process. December 2025, when the federal estate tax exemption reverts back to $5 million, will be here faster than you think. If the country needs to find revenue quickly, that change may come even sooner. Tax reform that occurs in 2021 is not likely to be retroactive to January 1, 2021, but there are no guarantees.

Reference: Forbes (Feb. 16, 2021) “Should a SLAT Be Part Of Your Estate Planning?”

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”

Estate Planning Actions to Consider before 2020 Ends

When it comes to estate planning, there’s no such thing as a “one-size-fits-all” solution. That is especially true before a presidential election. However, there are several factors that should be considered and discussed with your estate planning attorney, as recommended in this recent article from The National Law Review “Top Ten Estate Planning Recommendations before the End of 2020.”

The estate, gift and generational-skipping transfer tax exemption is now $11.58 million per person. It’s scheduled to increase every year by an inflationary indexed amount through 2025 and in 2026 will revert to $5 million. If Biden wins the election, don’t be surprised if changes are made earlier. The IRS has already said that if the exemption is used this year, there will be no claw back. This is a “use it or lose it” scenario. If you are planning on using it, now is the time to do so.

It is possible that Discounts, GRATS, Grantor Trusts and other estate planning techniques may go away, depending upon who wins the election and control of Congress. Consider taking advantage of commonly used estate planning tools before it is too late.

Married couples who are not ready to gift significant amounts to their children or to put assets into trusts for their children should consider the SLAT–Spousal Lifetime Access Trust. They can create and gift the exemption amount to a SLAT and still maintain access to the assets.

Single individuals who similarly are not ready to make large gifts and give up access to assets may also create and gift an exemption amount to a trust in a jurisdiction based on “domestic asset protection trust” legislation. They can be a beneficiary of such a trust.

Interest rates are at an all-time low, and that is when tools like intra family loans, GRATs and GLATs are at their best.

Moving to Florida, Nevada, Texas and other low- or no-income tax states has become very popular, especially for people who can work remotely. Be aware that high tax states like New York and California are not going to let your tax revenue leave easily. Check with your estate planning attorney to make sure you’re following the rules in giving up your domicile in a high-income tax state.

Reference: The National Law Review (Oct. 6, 2020) “Top Ten Estate Planning Recommendations before the End of 2020”