Financial advisors are taking a closer look at estate planning strategies as the administration of President Joe Biden eyes lower federal exemption levels on estate and gift taxes. Interest in spousal lifetime access trusts, also known as SLATs, has picked up among high-income clients.
Even if no changes to the exemption level happen now, the current federal lifetime gift and estate tax exclusion of $11.7 million per person, or $23.4 million for married couples, is set to expire in 2026. If that exclusion sunsets, the exemption would revert to the pre-2018 level of about $6 million, adjusted for inflation. Because of that possibility, “the SLAT becomes the single-most-discussed planning opportunity between advisors and their clients,” says Scott Grenier, manager of financial and estate planning at Baird.
Here’s what financial advisors should understand about SLATs:
— What is a SLAT?
— The upside of SLATs
— Pitfalls to avoid with SLATs
— Other considerations when choosing a SLAT
What Is a SLAT?
As the name implies, a SLAT is an estate planning strategy in which one spouse gifts assets in an irrevocable trust that benefits the other spouse, removing the assets from their joint estate. The donor spouse can still indirectly retain access to those assets, says Dean Borland, senior vice president and private wealth advisor at FineMark National Bank & Trust. In addition to benefiting the recipient spouse, the trust also eventually benefits a secondary recipient, usually the couple’s children.
When creating a SLAT, couples need to not only work with their advisor, but with an attorney who is familiar with tax law and this type of planning to make sure the trust follows the rules, says Andy Hart, CEO of Delegate Advisors.
A SLAT that is set up poorly can be rejected by the IRS. “Make sure you’ve got really experienced counsel and you understand the fundamental concept of why you’re doing this, for what purpose and for whose benefit,” Hart says. “You can design these to be a completed gift for future generations. But at the same time, it’s a current potential benefit for your spouse.”
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The Upside of SLATs
Hart says that when advisors start exploring estate planning with SLATs, they should look at how much wealth the family has and how much the family members are going to need to take care of themselves for the rest of their lives. “The hope is, you never need to touch this money,” he says.
Ideally, if a donor spouse can get approved for life insurance, that makes a good asset for a SLAT, says Eric Bond, wealth advisor at Bond Wealth Management. Other tax-deferred assets are also good choices. “Trust tax rates can get to be very high,” he says. “If you put securities in there, and the securities pay dividends, you must pay taxes. When life insurance pays out, it pays out estate-tax- and income-tax-free.” Private company stock or other investment assets that can grow for the long term are also worth considering for a SLAT, Hart says.
Another benefit of a SLAT is that it can offer protection from creditors because it is a trust.
Pitfalls to Avoid With SLATs
For married couples with large estates who may not need access to all of their wealth, it may make sense for each spouse to set up a separate SLAT for the other. But advisors and their attorneys must be aware of the reciprocal trust doctrine: SLATs cannot be funded with identical assets and cannot be set up at the same time. Borland says that the IRS will collapse trusts that violate the rules. Couples may have to do one SLAT this year and another next year, funded with different assets, to make sure they’re not running afoul of the IRS, Bond says.
Advisors should let clients know that although setting up a SLAT gets the assets out of their estate to avoid those taxes, the trade-off is that they will not receive a step-up in basis at the time of the donor spouse’s death, Borland says. Basis step-ups occur when the deceased spouse’s share in the cost basis of assets is stepped up to their value on the date of death.
“That is potentially a downside of a SLAT, but you do still get all of the appreciation going forward. All that is estate-tax-free as well,” Borland says.
Another pitfall to consider is that divorce or the death of the recipient spouse can mean the donor spouse loses access to the SLAT’s assets. “That’s why it’s really important not to put too much into the trust for the benefit of others if you really might need the money,” Hart says.
Other Considerations When Choosing a SLAT
Grenier says couples who have wealth of $30 million or more and are trying to be tax-efficient should use up at least one spouse’s estate and gift tax exemption of $11.7 million now, by making a gift ahead of the 2026 sunset of the current limits. For couples whose wealth ranges from $12 million to $25 million, “the key to using up this lifetime gifting is you’ve got to use up more than what the exemption will be in the future,” he says. It’s better for one spouse to maximize the exemption rather than create two separate SLATs that won’t reach the current cap.
Because SLATs require coordination between advisors and tax experts, couples considering the strategy should act now, so that their tax attorney has plenty of time to take the family’s full estate planning situation into account, experts say. SLATs should also have a third-party trustee, Hart says. The trustee has to be someone who’s not the recipient and not related or subordinate to the recipient.
Assets don’t have to be put into trusts immediately after they are created, Grenier says, so advisors can counsel couples that they have time to figure out what they want to include in the SLAT. If your clients are contemplating it, “I think the best phrase I’ve heard is, ‘It’s kind of like a safe-deposit box.’ Having this trust and getting it designed today does not mean you need to fund it today,” he says.
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