Spousal Lifetime Access Trusts (SLATs) are gaining popularity due to potential reductions in the historically high federal estate tax exemption. A spousal access trust (SLAT) is a legal arrangement that allows individuals to transfer assets from their estate while maintaining spousal access. This can be especially helpful for wealthy couples who want to lower their estate tax obligations. This post compares the benefits and drawbacks of these trusts and explains how they operate.
What Is Slat?
An irrevocable trust (SLAT) allows one spouse to remove assets from their combined estates by gifting them to a trust for the benefit of another spouse and family members.
The trust’s future asset value increases are not included in the estate’s federal estate tax value due to the donor spouse’s lifetime gifts to an SLAT.
How Does It Operate?
The trustmaker spouse provides the beneficiary spouse with the SLAT money or property, which they are the sole owner of. In a state where community property is permitted, a couple may need to use a partition agreement to convert common property into separate property. The donation is declared on a gift tax return by the spouse of the trustmaker. Distributions from the trust may be made to the beneficiary spouse, with the trust maker spouse potentially benefiting indirectly. Trust assets are distributed to surviving beneficiaries, often the couple’s children and grandchildren, upon the death of the benefit spouse.
What Are a Slat’s Primary Advantages?
SLATs have a plethora of possible benefits for anyone wishing to lower their tax liability, such as:
Diminishment of estate value: The value of the assets given to the SLAT by the spouse who created the trust is subtracted from the estate. Moreover, all potential appreciation is lost. The trust property is not included in the beneficiary spouse’s inheritance; instead, they receive dividends from the SLAT.
Lessen the tax burden: grantor trusts are the usual structure for SLATs. The spouse of the trust maker gets taxed on the trust’s taxable income. As a result, their estate value drops. The trustmaker spouse is exempt from filing an additional tax return for the SLAT as long as they are still living. If the SLAT is not set up as a grantor trust, a second tax return is needed.
Security of finances: Through the beneficiary spouse, a SLAT gives the trust maker spouse indirect access to the assets inside.
Disadvantages of Applying a Slat
Donations given to a SLAT are non-refundable and final.
The trust-maker spouse forfeits all rights to the funds and assets given to the SLAT if the beneficiary spouse passes away before them. If the couple were to get a divorce, this would still be the case. Remarrying could provide the trustmaker indirect access to the trust’s assets again.
The property gifted to a SLAT will not receive a cost-up after the death of the trust-maker spouse. A trust provision that permits the trust maker’s spouse to exchange trust property. The trust maker spouse can replace low-basis property with high-basis property or equivalent value cash, potentially reducing the disadvantage.
To fully utilize each spouse’s exemption amount, spouses constructing SLATs must adhere to the reciprocal trust doctrine. Assume the Internal Revenue Service determines that there are significant similarities between the two trusts. The SLAT’s goal would be undermined as it could potentially include trust property in spouses’ taxable estates.
The disadvantage can be eliminated by creating SLATs at different dates and selecting different trustees, beneficiaries, or distribution terms. A knowledgeable estate planning attorney is strongly advised due to the intricacy and potential tax consequences.
The Effect of SLATs on Taxes
Because SLATs are complex, many tax concerns need to be carefully evaluated by a tax planning expert to properly comprehend the tax implications for you and your family.
Estate and Gift Tax Exemptions: Since the GST (generation-skipping transfer tax) exemption is currently at an all-time high, it is advisable to take full advantage of it before any prospective revisions in 2025. It has been certified by the IRS and the U.S. Treasury Department that there won’t be a gift tax due (clawback) if the exemption decreases later. Completed gifts and future appreciation are protected from future estate and gift taxes by irrevocable trusts. If you receive gifts that exceed the yearly exclusion, you will have to file a gift tax return.
Income Taxes: SLATs are not subject to income taxes; they are regarded as distinct legal entities for ownership purposes only. Generally, they are set up as grantor trusts, which means that the donor spouse is responsible for paying the trust’s annual income taxes (interest, capital gains, and dividends). Spouses who are giving gifts should make sure they can afford to pay this tax obligation. Even while paying taxes is never enjoyable, over time the SLAT can become income tax-free by paying the annual tax on its income.
Capital Gains Tax: Any future appreciation on gifted assets in a SLAT may be liable to capital gains taxes as the donated assets do not receive a step-up in cost basis upon the donor’s passing.
Even though capital gains tax rates have often been lower than inheritance tax rates, beneficiaries should nevertheless think about possible tax ramifications if they plan to sell transferred assets. More importantly, while death and the associated taxes are eventually inevitable, estate tax planning techniques can postpone or eliminate capital gains taxes.
FAQs
What Does a Slat Serve As?
Spousal Lifetime Access Trusts, or SLATs, are becoming increasingly and more well-known as the historically high federal estate tax exemption is potentially reduced. A spousal access trust (SLAT) is a type of legal arrangement that helps people move assets out of their estate while preserving spousal access.
What Does a Slat Look Like?
Consider the $35 million assets of married couple William and Meredith as an illustration of how a SLAT might operate. William set up a SLAT for Meredith’s benefit and gave the trust the full sum of his $12.92 million lifetime exclusion amount.
What Does a Bed’s Slat Mean?
Slats are essentially a kind of bed platform that you place your mattress on. They are made up of long planks that are positioned horizontally inside the bed frame or mattress foundation’s breadth. Usually constructed of metal or solid wood, each slat fastens to rubber holders located within the frame.
Conclusion
In conclusion, since the current gift and estate tax exemptions may soon be lowered, using SLATs could be a fantastic strategy to effectively transfer money while locking in higher exemptions. To decide if a SLAT is good for you, you should carefully weigh the benefits and drawbacks of SLATs. You should consult with a knowledgeable estate planning lawyer and your reliable CBIZ tax advisor.
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