High Estate Tax Exemption Amounts are Going Away Should You Consider a Spousal Lifetime Access Trust (SLAT)?

With the lifetime estate tax exemption of $11.7M scheduled to expire December 31, 2025 (or sooner if proposed by legislation) and return to the inflation adjusted 2010 rate of approximately $6.4M, a SLAT can be an effective estate planning tool. Married couples can capture the lifetime exemption before it is reduced, minimize estate taxes and/or protect their assets from creditors.

A SLAT is an irrevocable trust in which one spouse (donor spouse) makes a gift to a trust for the benefit of the other spouse (non-donor spouse) and often children and grandchildren. It is most generally established as a means of utilizing the lifetime exemption with the goal of freezing the value of those assets and excluding the growth from the donor’s estate. In other words, all growth of those assets post transfer is excluded from estate tax exposure while the donor retains limited indirect access to the assets. One spouse may choose to fund a SLAT for the benefit of the other spouse, or each spouse may choose to fund a SLAT for the benefit of the other. As is the case with all gifting which is intended to reduce estate tax, I believe the best assets to transfer are those with the greatest potential for growth.

Why would you do it:

• Opportunity to use the lifetime exemption while it is at an all-time high: use it or lose it. The IRS finalized rules last year saying that it would not claw back lifetime gifts if/when the exemption is lowered (referring to it rolling back after 2025 to the 2010 level plus inflation).
• It is an effective estate freeze technique in removing growth from the taxable estate as all future growth is removed from the estates of both spouses.
• Non-donor spouse has direct access, which gives the donor indirect access. However, conservative practitioners recommend the non-donor spouse not request distributions from the SLAT unless it is necessary to maintain the non-donor spouse’s accustomed standard of living after considering other available resources.
• Can be effective intergenerational planning tool. In other words, it can be a dynasty trust passing assets down generations to avoid estate taxes at each generation.
• Typically, it is a Grantor Trust, so no additional tax return is required to be filed while the donor is alive.
• Provides asset protection from creditors, the degree to which depends on the provisions of the Trust.

What risks and factors should you consider?

• Death: At the death of non-donor spouse, the donor spouse loses indirect access.
• Divorce: In the event of divorce, the donor spouse loses indirect access.
• Tax Basis: No step up in basis. As is the case with all gifts the recipient receives carry-over basis. However, the Trustee can have right to swap assets at a later date in exchange for higher basis property.
• Exclusive Ownership: The transferred asset must be exclusively owned by donor, not jointly.
• Reciprocal Trust Doctrine: You must make sure the Trusts don’t violate the Reciprocal Trust Doctrine. Two trusts which are considered constructively similar or interrelated violate this doctrine risking the IRS pulling all the assets and growth back into the donor’s estate. Some differences may include creating and funding the trusts on different dates/years, including different classes of beneficiaries, providing different terms for distributions to beneficiaries, giving beneficiaries different rights of withdrawal, or granting beneficiaries the power to change beneficiaries under certain restrictions. I have clients where both spouses have SLAT’s.

Other thoughts:

• Non-donor spouse can serve as Trustee with limited powers to distribute. It’s a best practice to have a non-beneficiary serve as co-Trustee to avoid potential estate inclusion.
• It should be looked at in the same context as funding an Offshore Asset Protection Trust – which isn’t an estate tax planning tool but has some of the same limitations regarding lifetime distributions. These distributions should be considered assets of last resort, not to mention you defeat the purpose by taking distributions. Additionally, if it appears you have completely unfettered access, you risk the IRS collapsing it.
• In summary, SLATs are currently a means to make irrevocable transfers, use lifetime exemption which may be getting reduced even before December 31st, 2025, freeze the value of assets in your estate, and maintain limited access to these assets if need be.
  

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. None of the information in this document should be considered as legal or tax advice. You should consult your legal and tax advisor for information concerning your individual situation. Legal and tax services are not offered through, or supervised by, The Lincoln Investment Companies.

Trusts involve upfront costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing a trust strategy.

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