Advanced Planning Topic: Spousal Limited Access Trusts (SLATs)

Advanced Planning Topic: Spousal Limited Access Trusts (SLATs)

Spousal Limited Access Trusts (SLATs) are a strategic approach to gifting assets to a spouse during one’s lifetime, all while avoiding the assets being included in the beneficiary spouse’s taxable estate upon such spouse’s eventual passing.

Each spouse has a lifetime Federal Estate Tax Exemption of 12.92M under 2023 laws.

Traditionally, couples aim to preserve their exemptions until one passes away. The deceased spouse’s Will would then establish a trust for the surviving spouse, funded with up to the deceased spouse’s exemption limit. The trust for the surviving spouse is often referred to as a Credit Shelter Trust.  The problem is that the exemption limit may be less at the time a spouse passes away than it is now.  In fact, the Federal Estate Tax Exemption is set to decrease to 5M by the end of 2025.

The emergence of the use of SLATs capitalizes on the existing Federal Estate Tax Exemption before its anticipated reduction by accelerating the funding of the Credit shelter trusts via lifetime gifts.

The anticipated reduction could lead to a significant estate tax increase for individuals with substantial net worth who fail to use their exemptions prior to 2026.

To mitigate this, the SLAT strategy involves funding a Credit Shelter Trust before 2026.

The strategy helps prevent potentially higher taxes upon the surviving spouse’s death.

To limit Federal Estate Tax liability, those with Federal Estate Tax exposure will want to fund Credit Shelter Trusts to the greatest extent possible and the SLAT strategy allows for that.

Below are the mechanics:

SLATs are established by one spouse (the “Grantor Spouse”) for the other (the “Beneficiary Spouse”). Often, both spouses establish SLATs for each other to utilize both exemptions (25.84M collectively).

The Beneficiary Spouse can receive income and principal from the SLAT, including income generated by business interests or real estate owned by the SLAT

During the SLAT’s term, the Grantor Spouse retains access to the trust assets through marriage to the Beneficiary Spouse.

Assets within SLATs, along with their potential appreciation, avoid Federal Estate Tax upon the Beneficiary Spouse’s death. This leads spouses to use non-SLAT assets for daily expenses to leverage the tax benefits of SLATs.

Income, interest, and dividends from SLAT assets, which are not distributed to the Beneficiary Spouse and which remain in the SLAT, could be taxed back to the Grantor, creating a tax-free gift (to the SLAT remainder beneficiaries) each time such taxes are paid.

Implementation requires time for trust documents to be prepared, assets identified and valued, and transfers staggered. For assets prone to substantial appreciation, starting the SLAT process sooner maximizes benefits and should ideally commence well in advance of the scheduled January 1, 2026 exemption reduction.

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