The recently proposed federal tax legislation reduces our gift/estate/generation skipping transfer tax exemptions from the present $12.06 million to approximately $6 million. Even if the legislation is not enacted, the current exemptions are set to automatically change on December 31, 2025, resulting in a similar reduction. The question becomes, “Is there a way to preserve and take advantage of the higher exemption?” The answer is “Yes”, through the use of what is commonly referred to as a “SLAT”.
A Spousal Lifetime Access Trust, or “SLAT” for short, is an advanced estate planning tool where spouses each place investment assets into an irrevocable trust for the benefit of the other. It’s important to note that because SLATs are irrevocable, once you have signed and placed your assets in the trust, it’s difficult to undo the transaction without adverse consequence.
The main idea behind this strategy is that, by gifting assets into your trust for the benefit of your spouse, you utilize your lifetime gift tax exemption before any changes to the exemption amount occurs. As you know, your gift and estate tax exemptions work together, so “using it” during lifetime captures the higher amount now.
With a SLAT, generally, the income earned on the investments transferred to the trust may be paid to your spouse. In other words, Husband’s SLAT for Wife could pay Wife income and vice versa. While many believe a SLAT defines one specific type of trust, there are many options when creating one. Consequently, it’s common for one individual’s SLAT to have very different provisions than another’s. Moreover, everyone has different assets that they’ll use to transfer into their SLAT. Unrealized gain, dividends, interest, growth, and other variables play into the success of the strategy.
Remember that gift transfers during life do not receive a step-up in tax cost basis when the transferor dies. Contrast this with post-death transfers, which do receive a step-up. In addition to these tax considerations, there are also risks with the SLAT, including the possibility of divorce or death of a spouse and determining what then happens to the assets in the trust. These potential drawbacks need to be weighed against the benefits of implementing a SLAT.
For more information on whether a SLAT is the correct estate planning tool for you and your family, please contact Simmons & Schiavo at 781-397-1700 to schedule an initial consultation.