SLATs Are The Hot Estate Planning Tool In 2020
In the last article, we talked about GRATs, which are Grantor Retained Annuity Trusts. In this article, we are going to talk about SLATs, which are Spousal Limited Access Trusts.
Currently, the federal estate tax exemption is $11,580,000.00 per person. However, in 2026, the estate tax exemption is going to be reduced back into the $5,000,000.00 to $6,000,000.00 range per person. In addition, you may have heard that on November 3, we have a presidential election. Depending on who wins that presidential election, the estate and gift tax laws may change sooner than 2026. For example, if Joe Biden wins, and depending on who has control of the House of Representatives and the Senate, there is some thinking that the estate tax exemption could be significantly lowered sooner than 2026. There is also some thought that the current estate tax rate of 40% could be increased to 50% or more, as it was a number of years ago. As a result of all of this uncertainty, a number of high net worth individuals are looking to lock in their estate tax exemptions, since the IRS has stated that if you use more of your exemption now than the amount of the exemption that exists in the year you pass away now, they will grandfather that use of the larger amount of the exemption.
For example, if you make a gift and use $10,000,000 of your exemption today (when the exemption is $11,580,000) and you pass away when the exemption is $5,000,000, the IRS will grandfather your use of the larger exemption amount. Thus in the example, this could be a $2,000,000 estate tax savings for your family.
A Spousal Limited Access Trust (“SLAT”) is a trust that one spouse creates in which the other spouse is the trustee and the beneficiary and has the right to use the assets that are in the trust. The spouse that establishes the trust is, therefore, making a gift to the trust and utilizing part or all of their estate tax/gift tax exemption. The purpose of this is to lock in the use of the exemption in case the exemption is reduced later on in the year of death. Some spouses actually create SLATs for each other. However, a number of factors need to be considered so that the reciprocal trust doctrine does not apply and undermine the planning.
A SLAT is the perfect estate planning vehicle for high net worth individuals to utilize to lock in their current estate tax exemption. One spouse sets up a SLAT and gifts assets in excess of $5,000,000 to the SLAT. The other spouse is the trustee and the beneficiary of the trust and can utilize the assets in the SLAT. Thus, the family unit still has access to the assets in the SLAT. The perfect plan would be for a couple to establish a SLAT and utilize their non-SLAT assets first and still have the SLAT assets to use if they ever need them. Since the SLAT will be out of both spouses’ estates when they pass away, the growth of the assets in the SLAT will also be out of both spouses’ estates. The SLAT is a grantor trust, which means that the spouse that established the SLAT will pay all of the income taxes. This is, in fact, almost like making an additional gift to the trust because the trust does not have to pay the income taxes on the income earned by the trust assets. The assets will then pass to the couple’s children and future generations and none of those descendants will ever pay any estate taxes on the assets in the SLAT.
If you would like more information regarding the potential use of a SLAT in your estate plan, please contact your local estate planning attorney.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.
405 Chauncey Avenue NW
New Philadelphia, Ohio 44663
Phone: (330) 364-3472
Fax: (330) 602-3187