CLIENT LOGIN
CLIENT LOGIN
Back to Insights

Before the Ballots: The Strategic Advantage of a SLAT During an Election Year 

Couple enjoying a class of wine and smiling at the phone

With less than 70 days until election day, the future of both the White House and the Senate hangs in the balance. Regardless of who wins, the ongoing challenges of rising federal deficits, unprecedented spending, and lower tax revenues could pave the way for higher taxes in the future. The estate tax exemption, which primarily impacts the very wealthy, could become a target for change. For clients with significant estates, now may be the ideal time to consider a Spousal Lifetime Access Trust (SLAT) as part of your estate planning strategy. 

Why Consider a SLAT? 

Current law allows individuals to transfer up to $13.61 million ($27.22 million for married couples) without incurring estate or gift taxes. While establishing a SLAT requires giving up the use of the assets during your lifetime, it offers the opportunity to lock in the current exemption amount and grow assets outside of your taxable estate while retaining access through your spouse. 

How a SLAT Works 

  • Setup: Spouse 1 establishes an irrevocable trust for Spouse 2. Spouse 2 can receive income and principal distributions from the trust for health, education, support, and maintenance. Typically, Spouse 2 is the primary beneficiary, and upon their passing, the assets usually continue in trust for descendants. Spouse 2 can also serve as the trustee. 
  • Tax Benefits: Spouse 1 transfers assets to the trust, applying a portion of their exemption. Although this transfer is reportable on a Form 709 (gift tax return), it does not incur gift tax. The trust’s assets are removed from Spouse 1’s taxable estate, including any growth, but Spouse 1 can still benefit indirectly through Spouse 2. 
  • Generation-Skipping Trust: The trust is often set up as a generation-skipping trust, allowing assets to be held for future generations without incurring estate tax across generations. 
  • Reciprocal Trusts: Spouse 2 may also set up a trust for Spouse 1, but it’s crucial that the trusts differ substantially to avoid the reciprocal trust doctrine, which could nullify the benefits of both trusts. 

Considerations and Disadvantages 

  • Irrevocability: Once established, a SLAT cannot be changed. 
  • Asset Separation: The trust must be funded with separate assets, not joint assets. 
  • Access Loss: Upon the death of the spouse, the grantor loses access to the trust’s funds. 
  • No Step-Up in Basis: Assets in the trust do not receive a step-up in basis at death since they are not included in the taxable estate. 
  • Reciprocal Trust Doctrine: Establishing two trusts must be carefully managed to avoid this risk.  

Learn more about issues to consider when creating your estate plan here. 

Why Act Now? 

While the Tax Cuts and Jobs Act currently reduces the number of estates affected by the estate tax, the possibility of future changes remains. As administrations shift and tax policies evolve, the opportunity to take advantage of the current estate tax exemption might not last. By considering a SLAT now, you can maximize tax-efficient wealth transfer and growth, ensuring long-term flexibility for your family regardless of future tax code changes. 

Ready to discuss how a SLAT could fit into your estate planning strategy and protect your family’s financial future?

Connect with an advisor.  

Categories

Recent Insights