Before the Ballots: The Strategic Advantage of a SLAT During an Election Year
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?
Categories
Recent Insights
-
Understanding Form 5500: A Guide for Business Owners
When it comes to managing your company’s retirement plan, one of the most important responsibilities is filing Form 5500. This form is crucial for maintaining compliance and protecting both your business and your employees. Let’s break down what Form 5500 is, why it matters, and share some practical advice on what to do if you’ve…
-
Expert Insight on Financial Independence for Women
The Women’s Guide to Financial Independence
-
Average Retirement Account Balance of Americans
Retirement Savings by Age
-
Issues to Consider When Creating Your Estate Plan | 2024
Estate planning can often be overlooked, yet it’s crucial for ensuring your wishes are carried out and your assets are managed effectively. Many people are unsure where to start or what questions to ask. This checklist is designed to provide clarity and guide you through the essential elements of estate planning. Key Considerations Include: Use…