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12 Reasons a SLAT Makes Sense

Spousal lifetime access trusts can be effective and flexible solutions for married couples looking to take advantage of existing estate and gift tax laws while maintaining control of their assets. By Daniel F. Rahill, CPA, JD, LL.M., CGMA | Digital Exclusive - 2021

Estate tax changes are definitely on the way. The current estate tax exemption threshold is $11.7 million per individual (indexed for inflation) with a top tax rate of 40 percent. After 2025, this amount will revert to the pre-2018 exemption, an indexed amount of approximately $5.8 million. President Joe Biden’s campaign platform proposed accelerating the reduction of the exemption and dropping it to $3.5 million with a top tax rate of 45 percent, a move likely to be pursued in the coming year. Sen. Bernie Sanders’ For the 99.5 Percent Act goes even farther, proposing to reduce the estate tax exemption amount to $3.5 million, not indexed for inflation. Sanders’ plan would reduce the gift tax exemption from $11.7 million to $1 million and would raise estate and gift tax rates as high as 65 percent.

These proposals have individuals and families with taxable estates looking for ways to utilize their lifetime gift exemptions in 2021. Traditionally, this gifting would take the form of gifts to children, grandchildren, or trusts. However, many clients are reluctant to relinquish access to a significant amount of their funds or are hesitant to give their children or grandchildren immediate control of the gifted assets. That’s where a spousal lifetime access trust (SLAT) comes in.

What’s a SLAT?

Given the coming reductions to the estate tax exemption, as well as the proposed changes from Biden, Sanders, and others, many married couples are finding a SLAT to be an effective and flexible option. A SLAT is an irrevocable trust created by one spouse (the grantor) for the current benefit of the other spouse (the beneficiary), typically with the remaining interest in the trust passing to the grantor’s children upon the death of the beneficiary spouse.

12 Reasons a SLAT Makes Sense

1. The phrase “spousal lifetime access” reflects the chief advantage of a SLAT: The beneficiary spouse can receive distributions from a SLAT as needed for his or her health, education, maintenance, or support (aka the HEMS standard). Thus, the SLAT can essentially pay half of the household expenses—though by returning some of the assets, the couple loses some of the estate tax benefits of the original transfer.

2. A beneficiary spouse may serve as trustee but would be limited to only make distributions to themselves under the HEMS standard. A trustee other than the beneficiary spouse may have the power to distribute assets from the trust to the beneficiary beyond what is needed for HEMS, so long as there is not an understanding between the beneficiary and the trustee that the trustee will make distributions in excess of what is allowed by HEMS.

3. The SLAT can designate both a distribution trustee and an investment trustee, so that the grantor can choose the person best qualified for each role. A corporate co-trustee can also be designated to assist in the administration of the trust.

4. The primary beneficiary is generally the grantor’s spouse, with siblings, children, grandchildren, or other descendants being named as current or remainder beneficiaries, but the trust can also be drafted with flexible power of appointment provisions. An independent trustee has the ability to “undo” the trust by transferring all assets in the SLAT to the beneficiary spouse.

5. The assets of a SLAT will not be included in the estate of either the grantor spouse or the beneficiary spouse upon death. Gifts from the grantor spouse to the SLAT count against the $11.7 million 2021 lifetime transfer tax exemption.

6. Any appreciation on the transferred assets between the date of the transfer and the date of death escapes estate taxation at death. Further, if the generation-skipping transfer tax exemption is allocated to a SLAT, it can be structured to create “dynasty” trusts for children and grandchildren upon the death of the beneficiary spouse, meaning these trust assets will not be includible in their estates.

7. Transferring assets to a SLAT can also provide protection from creditor claims on both the donor spouse and the beneficiary spouse, assuming no fraudulent conveyance and that the trust has an independent trustee.

8. For income tax purposes, a SLAT can be treated as a grantor trust, meaning that all items of income, deduction, and credit are attributed to the grantor spouse, rather than to the trust itself. The grantor’s payment of the income tax liability for the SLAT is not considered a taxable gift, which effectively allows the grantor to make further transfers to the trust beneficiaries without using a transfer tax exemption. As a grantor trust, the SLAT does not pay any income tax but should file a blank tax return with a statement that the income and expenses are included on the grantor’s tax return.

9. The SLAT can loan money to the grantor and family members at arm’s length, or exchange or sell assets to the trust.

10. A discount can currently be taken in determining the value of a minority or nonvoting interest in an LLC or other entity in a sale or transfer, thus enhancing the value of the transfer for estate and gift tax purposes.

11. If a vacation home owned by the grantor spouse is transferred into the SLAT, the donor spouse has the option to pay rent to the trust. This would have no income tax consequences to the grantor so long as the SLAT is a grantor trust, enabling the grantor to make additional tax-free gift transfers to the trust.

12. In the instance of divorce, the trust can divide into two SLATs, one for the beneficiary spouse and one for the grantor’s descendants with a new trustee. Floating spouse provisions can also be included to address the possible death of a beneficiary spouse followed by the grantor’s remarriage.

Two notes: First, spouses wishing to set up reciprocal SLATs need to be aware of the reciprocal trust doctrine. When two trusts are too similar, the assets of both trusts could be included in their respective estates if challenged by the IRS and could be subject to creditor claims. For this reason, trusts should not be created in mirror images of each other. It is safer for any trust funded by the recipient spouse to be for descendants only. Second, there are alternatives to SLATs that can be just as effective for unmarried individuals. One is a variation called a domestic asset protection trust, permitted in 19 states, where the grantor can be the beneficiary of their own trust with access ability.

For all these reasons, SLATs are a powerful estate planning tool for couples who are hesitant to lose access to a significant portion of their assets but still want to take advantage of existing gift and estate tax laws lifetime gifting exclusion before they vanish.

Illinois CPA Society member Daniel F. Rahill, CPA, JD, LL.M., CGMA, is a managing director at Wintrust Wealth Management. He is also a former chair of the Illinois CPA Society Board of Director and is a current Board Member of the American Academy of Attorney-CPAs.

This information may answer some questions, but is not intended to be a comprehensive analysis of the topic. In addition, such information should not be relied upon as the only source of information; professional tax and legal advice should always be obtained. Securities, insurance products, financial planning, and investment management services are offered through Wintrust Investments, LLC (Member FINRA/SIPC), founded in 1931. Trust and asset management services offered by The Chicago Trust Company, N.A. and Great Lakes Advisors, LLC, respectively. © 2021 Wintrust Wealth Management Investment products such as stocks, bonds, and mutual funds are: NOT FDIC INSURED | NOT BANK GUARANTEED | MAY LOSE VALUE | NOT A DEPOSIT | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY

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