Spousal Lifetime Access Trusts (SLAT)– A Way To Use Exemptions Before They Disappear
Today’s historically high estate and gift tax exemption amounts ($11.7 million per person or $23.4 million per couple) are set to sunset at the end of 2025, or possibly sooner under a Biden administration. President Biden’s proposals include a return to 2009 exemptions levels which means $3.5 million estate tax exemption and $1million gift tax exemption.
In the estate planning industry, the general belief is that the current exemption is as high as we will see in our lifetimes. This has left many individuals wondering if there is a way to use the current exemption level without fully giving away all of their assets to children or other beneficiaries. If you are married, one answer might be the spousal lifetime access trust (or SLAT).
Transferring assets to a spousal lifetime access trust (or SLAT) now allows you to use these higher exemption amounts before they disappear. A SLAT can last for as long as makes sense for your family—even continue on for multiple generations—free not only from the estate tax but from the GST tax as well.
Typically, a SLAT benefits your spouse. You can choose to benefit any other people as well, including children, friends, and charities. Your spouse can also create a similar but not identical SLAT for your benefit. The SLAT provides protection against both federal estate taxation and creditor claims.
What’s the catch? The real consideration is what happens if (1) your spouse predeceases you; or (2) you divorce your spouse.
If your spouse predeceases you, the beneficiaries that are next in line become present beneficiaries. Typically, your children and possibly grandchildren would step into your spouse’s shoes and become the trust beneficiaries. This means you must either have enough assets in your estate to take care of yourself after your spouse dies (including whatever you inherit from your spouse), or you have to trust your children enough to know they will take care of you. However, relying on your children and grandchildren could technically create gift and estate tax issues. Unlike gifts to spouses, gifts between parents and children are limited to the available exclusion amount.
The outcome is essentially the same if you and your spouse divorce. The trust can be drafted such that your spouse is only the beneficiary if you remain married. If you divorce, they are removed as beneficiary, and the contingent beneficiaries become current beneficiaries (so, likely your children).
However, properly drafted SLATs can include provisions that will allow you to access the trust assets if you really need them through a trust protector- a person you appoint to step in and direct a portion of the assets to you. This makes the SLAT incredibly flexible, allowing you to use your estate tax exemption now, remove all growth from your future estate, continue to have access through your spouse and other beneficiaries, and still have the power to directly access the assets in an emergency situation that you need to.