Posted In: Trusts & Estates & Tax - Business & Corporate
By Gina M. Bevack-Ciani on July 27, 2021
With the current lifetime estate, gift, and generation-skipping tax exemption at an all-time high ($11.7 million), now is the time to review your estate plan and consider capitalizing on additional techniques and strategies to protect your estate and minimize your potential estate tax.
One trend that is gaining popularity for those looking to minimize their tax burden, as well as protect assets, is a Spousal Lifetime Access Trust (SLAT).
From a tax standpoint, the SLAT allows individuals to transfer assets up to the maximum allowable exemption amount into the trust, and the assets are excluded from both spouses’ estates, thus avoiding estate tax at the death of the spouses.
The appeal of the SLAT comes from the fact that while it is an irrevocable trust, it is set up by one spouse for the benefit of the other spouse. Unlike other irrevocable trusts in which total control must be relinquished, a married couple may feel more comfortable with a SLAT for the simple reason that the grantor spouse creating the trust can have “indirect” access to the trust’s income and principal through the beneficiary spouse. Further, the beneficiary spouse is permitted to act as the Trustee and can make distributions as needed.
A summary of the key points and advantages are as follows:
- Irrevocable trust set up by one spouse for the benefit of the other spouse
- Trustee may be the beneficiary spouse
- Trustee may distribute income and principal as needed for the spouse for health, welfare, education, maintenance and support
- May include a crummy power for beneficiary spouse
- May give beneficiary spouse a testamentary limited power of appointment to “rewrite” the trust provisions on his/her death
- Allows the grantor spouse to have “indirect” access to the trust’s income and principal through the beneficiary spouse
- When the beneficiary spouse passes away, the appointed trust property (including appreciation) passes free of estate tax to the children (or even more remote descendants)
- Protects the beneficiaries from creditors (or ex-spouses)
- Because it’s a grantor trust, the SLAT’s assets compound interest free of income taxes
Like all techniques, there are some disadvantages, including premature death of a spouse or divorce, but careful consideration and consultation with legal counsel can proactively address these issues.
With the current estate tax exemption set to be cut in half in 2026, many clients are taking advantage of the use of SLATs and other estate planning techniques before it is too late.
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