While the estate and gift tax exemption is currently at an all-time high, some married couples may consider the use of a Spousal Lifetime Access Trust (SLAT) in order to leverage the current gift tax landscape through tax-efficient estate planning strategies. Let’s take a look at the current state, and understand both the advantages and disadvantages of a SLAT.

Estate and Gift Tax Exemption

For individuals facing estate tax liabilities, there is a narrow window of opportunity to take advantage of the current gift tax law. Individuals can gift up to 11.7 million, the current estate and gift tax exemption for 2021 ($23.4 million for married couples) in their lifetime. The estate and gift tax exemption is set to expire (sunset) at the end of 2025, and the exemption will revert back to the prior estate tax exemption of $5 million for individuals ($10 million for married couples), indexed for inflation.

Additionally, the Internal Revenue Service (IRS) issued regulations in 2019 that there would not be a “claw back” for lifetime gifts made under the expanded exemption. This means there is a window between now and the end of 2025 to take advantage of gifting strategies to lock in the lifetime gift tax exemption before it is reduced.

Leveraging the current gift tax landscape

The current gift tax environment, combined with low interest rates, creates a rare alignment. Individuals can benefit by accelerating gifting now, thereby reducing their taxable estates and transferring wealth to the next generation in a tax-efficient manner.

For those who are considering gifting, the questions becomes: What is the best way to leverage the current gift tax landscape? There are a number of considerations depending on your circumstances, but let’s take a look at one particular strategy to start.

What is a spousal lifetime access trust?

Some of the most effective estate planning strategies involve the use of irrevocable trusts.

An irrevocable trust means that the trust terms cannot be modified, amended, or terminated without permission from the grantor’s appointed beneficiary(ies), and the grantor has no legal rights of ownership to the assets and the trust. Transferring assets into an irrevocable trust can be a daunting undertaking, even if it makes financial sense. You may be hesitant to place assets outside of your control, because you may be concerned about what would happen if your financial fortunes suddenly take a negative turn after you have irrevocably transferred a portion of your wealth.

One solution is a Spousal Lifetime Access Trust (SLAT). A SLAT is an estate planning tool for married couples who want to take advantage of making irrevocable lifetime gifts. One spouse (the grantor) makes a gift into a trust for the benefit of the other spouse (as well as other family members such as children and/or grandchildren). The SLAT allows the grantor spouse to take advantage of using all or a portion of his or her lifetime gift exemption, while easing concerns about loss of control—because the grantor spouse has indirect access to the income and assets of the trust via their spouse.

Comparing SLATs and Credit Shelter Trusts

The SLAT is similar in structure to a credit shelter trust, providing access to income and/or principal for the needs of a surviving spouse. The difference, however, is that a SLAT is funded by a gift while the donor is still alive, as opposed to a credit shelter trust that is funded by bequest when someone passes away. As with a credit shelter trust, the SLAT can be designed so that in addition to having the spouse as a beneficiary, one’s children and grandchildren can also be beneficiaries.

A SLAT can provide quite a bit of flexibility. For instance, the trust can be set up to make distributions based on an “ascertainable standard,” such as a spouse’s health, education, maintenance, or support.

Another option is to give a trustee full discretion to distribute income or principal to a spouse. The fundamental goal, similar to a credit shelter trust, is to get assets into a trust that can still provide some financial assistance to a beneficiary, while ensuring that those assets—and any future growth upon them—will not be included in the beneficiary’s estate.

Additional Considerations

In some families, it may make sense to create two trusts. In this case, each spouse would create a SLAT for the benefit of the other spouse, thus, allowing both spouses to maximize their lifetime gift tax exemption. However, it’s important to make sure each trust is drafted properly to avoid the reciprocal trust doctrine. In other words, the trusts can be similar, but they cannot be mirror images of each other. For instance, you can have the trusts drafted in different states, at different times, with different assets, and with different trustees. In addition to each spouse being a beneficiary, you can have other beneficiaries, such as children on one trust and grandchildren on another.

SLATs can provide several advantages:

  • Allows for future appreciation of the assets to take place in the trust outside of the estate of either the donor spouse or the beneficiary spouse.
  • Removes assets from the donor and beneficiary spouse’s estate, potentially eliminating any state estate tax exposure.
  • Provides protection for bloodline and against claims by beneficiaries’ creditors.
  • Allows you to utilize the lifetime gift tax and generation-skipping transfer tax exemption, providing a powerful strategy to leverage dynastic gifting.

SLATs also have some disadvantages:

  • Transfers are irrevocable; once the gifts are made to the SLAT, they are out of your control.
  • If you get divorced, you could lose the indirect access from the SLAT through your spouse.
  • When your spouse dies, you could lose indirect access from the SLAT through your spouse. 

A Spousal Lifetime Access Trust (SLAT) can be a viable strategy to obtain the optimal benefits of an irrevocable trust. However, it is critical that you discuss the advantages and disadvantages of SLATs with your estate planning attorney, Financial Advisor, and accountant.

Working with Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs, which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

 

About the author

Laura Medigovich

Vice President/Senior Financial Planner

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