Spousal lifetime access trusts, also known as SLATs, were a popular vehicle during the past two years for financial advisors seeking estate planning strategies to get ahead of potentially lower federal exemption levels on estate and gift taxes.
Emily Smith, director of financial planning at Williams Jones Wealth Management, says there was a lot of movement to create SLATs for high-income clients when it appeared more likely that President Joe Biden’s spending plan, known as Build Back Better, would pass. With that still in limbo, Smith notes there’s been less urgency on the part of clients to shelter funds.
However, it may be a mistake for advisors to ignore other looming deadlines. Even if no changes to the exemption level happen now, the current federal lifetime gift- and estate-tax exclusion, known as the unified credit, which is currently $12.06 million per person, or $24.12 million for married couples, is set to expire in 2025. If that exclusion sunsets, the exemption would revert to the pre-2018 level of about $6.6 million, adjusted for inflation, in 2026.
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.
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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 also 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 Internal Revenue Service. “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.”
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 gets 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 are 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.
Smith says with market returns down, now can be a good time to utilize the exemption. “It’s still a vehicle to get appreciation out of your estate, the sooner, the better,” she says.
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. When the deceased spouse’s share in the cost basis of assets is “stepped up” to its value on the date of death, the amount of capital gains tax owed by the recipient is reduced.
“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
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.
“I always like to put pen to paper when I’m talking about strategies and really look at the numbers to see how it actually affects your life,” Smith says.
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.
Smith says clients who may be on the fence about SLATs can open one and hold off funding it until they decide how much and what assets to include.
“If we see a huge change in tax law, or the big reduction in the exemption, and (the client is) ready to go, we can just sweep the funds over the same day,” she says.
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What Advisors Should Know About SLATs originally appeared on usnews.com
