One of the basic principles behind proper estate planning is to help ensure that decedents’ hard-earned wealth passes to their heirs in the most tax-efficient manner, which often means minimizing exposure to federal estate and gift taxes. While there are a variety of trust vehicles and other strategies individuals may use to achieve this goal, a spousal lifetime access trust (SLAT) offers grantors the flexibility to not only remove assets and their future appreciation from their taxable estates to reduce estate tax liabilities at death but to also retain access to and control over those assets during their lifetimes.
Individuals who die in 2023 may pass $12.92 million of their estates to their heirs tax-free (or $25.84 million for married couples filing joint returns.) Assets above this exclusion amount at death are subject to a 40 percent federal estate tax. Under current law, this very generous estate tax exemption is set to revert to its pre-2018 level of $5.49 million on Jan. 1, 2026, unless the political winds extend the law or reduce the estate tax exemption before this date. In preparation for this eventual change in estate tax law, many individuals with significant wealth are making gifts to beneficiaries while they are still alive, essentially transferring assets and their future appreciation out of their taxable estates along with their ability to control and use those funds while they are alive.
By contrast, SLATs are a type of irrevocable trust one donor spouse (the grantor) creates for the benefit of the other non-donor spouse (beneficiary) and other named decedents to use during that nondonor spouse’s lifetime. Grantors transfer assets they own individually (not property jointly owned with a spouse) to the SLAT via a completed gift. This removes assets from their taxable estates and the estates of their beneficiary spouses, who may also be named trustees and granted the power to manage and direct distributions of trust assets for reasons that may include the maintenance of the grantor and beneficiary’s standards of living during their lives. In other words, SLAT grantors may have an indirect benefit to the assets entrusted for the benefit of their spouses, provided they remain married to the beneficiary spouses.
When the beneficiary spouse passes away, the SLAT assets remain in trust and allow the initial grantor’s gift to appreciate for the benefit of named heirs outside the taxable estates of both the grantor and the now-deceased beneficiary spouse. The grantor will no longer have indirect access to the trust assets. Upon the grantor’s death, children and other named beneficiaries will continue to receive distributions of trust assets according to the terms of the trust. However, it is essential to note that the beneficiary spouse will not receive a step-up in the fair market value of the initial assets originally transferred to the SLAT by the donor spouse.
While both spouses can create separate SLATs for the benefit of their non-donor spouses, special care should be taken to ensure the SLATs do not run afoul of the Reciprocal Trust Doctrine, which can unwittingly cause both SLATs to become “uncrossed” and its assets taxable in the original donor’s estate.
A SLAT can be a good option for high-net-worth couples who wish to reduce their exposure to estate tax at death but are not comfortable making significant gifts to their children during life. This is especially true when one or both spouses will need access to trust assets to cover daily expenses or rising medical costs in the future.
About the Author: Lee F. Hediger is a co-founding director with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provwealth.com.
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Lee F. Hediger is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. All information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. RJFS does not provide tax advice. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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Posted on July 27, 2023