2021 Financial Planning: The Increasing Popularity of SLATs

These proposals have individuals and families anticipating taxable estates looking for ways to utilize their lifetime exemptions in 2021. Traditionally, this gifting would take the form of gifts to children, grandchildren or trusts for their benefit. However, many clients are reluctant to give up access to a significant amount of funds. Or, clients may be reluctant to give their children or grandchildren immediate access to the assets transferred.

Spousal Lifetime Access Trusts

Given the present proposed changes with respect to the federal estate and gift tax laws, and knowing the estate tax exemption will be reduced in half after 2025 in any event, many married clients are entering in an estate planning trust arrangement known as a “Spousal Lifetime Access Trust”, or SLAT. A SLAT offers married clients flexibility in making gifts while utilizing what might be a vanishing lifetime gifting exclusion.

A SLAT is an irrevocable trust created by one spouse (referred to as the “grantor spouse”) for the current benefit of the other spouse (referred to as the “beneficiary spouse”), typically with the remainder interest in the trust passing to the grantor’s children upon the death of the beneficiary spouse. The phrase “spousal lifetime access” reflects what for many clients is the chief advantage of a SLAT, namely that the beneficiary spouse can receive distributions from the SLAT. Thus, for example, if the couple’s financial situation deteriorates after a gift is made, distributions can be made to the beneficiary spouse from the SLAT.

A Dozen Reasons Why SLATs Make Sense

1. A SLAT can make distributions to the beneficiary spouse as needed for his or her health, education, maintenance or support (HEMS). Thus, the SLAT can essentially pay half of the household expenses. (By returning some of the assets, however, the couple loses some of the estate tax benefits of the original transfer.)
2. From a trustee perspective, a beneficiary spouse may serve as trustee, but would be limited to making distributions to themselves under the HEMS standard. A trustee other than the beneficiary spouse may have the power to distribute assets from the trust to the beneficiary beyond what is needed for HEMS, so long as there is not an understanding between the beneficiary and the trustee that the trustee will make such distributions in excess of what is allowed for HEMS.
3. The SLAT can designate a distribution trustee and an investment trustee, since the grantor may feel that the trustee who might be an investment professional may not be the most desirable person to make beneficiary distribution decisions. A corporate co-trustee should also be considered to assist in the administration.
4. The primary beneficiary is generally the grantor’s spouse, with siblings, children, grandchildren or other descendants being named as current or remainder beneficiaries, but the trust can also be drafted with flexible power of appointment provisions An independent trustee has the ability to “undo” the trust by transferring all assets in the SLAT to the beneficiary spouse.
5. The assets of a SLAT will not be included in the estate of either the grantor spouse or the beneficiary spouse upon death. Gifts from the grantor spouse to the SLAT count against the $11.7 million 2021 lifetime transfer tax exemption as we try to utilize this exemption in this “use it or lose it” environment.
6. Any appreciation on the transferred assets between the date of the transfer and the date of death escapes estate taxation at death. Further, if the generation-skipping transfer tax exemption is allocated to a SLAT, it can be structured to create “dynasty” trusts for children and grandchildren upon the death of the beneficiary spouse, meaning these trust assets will not be includible in their estates.
7. Transferring assets to a SLAT can also provide protection from creditor claims on the both the donor spouse and the beneficiary spouse assuming no fraudulent conveyance and the trust has an independent trustee.
8. For income tax purposes, a SLAT can be treated as a “grantor trust” which means that all items of income, deduction and credit are attributed to the grantor spouse, rather than to the trust itself. The grantor’s payment of the income tax liability for the SLAT is not considered a taxable gift, which effectively allows the grantor to make further transfers to the trust beneficiaries without using any transfer tax exemption. As a grantor trust, the SLAT does not pay any income tax but should file a blank tax return with a statement that states that the income and expenses are included on the donor’s tax return.
9. The SLAT can loan money to the grantor and family members at arm’s-length, or exchange or sell assets to the trust.
10. A discount can currently be taken in determining the value of a minority or non-voting interest in an LLC or other entity in a sale or transfer, thus enhancing the value of the transfer for estate and gift tax purposes.
11. If a vacation home owned by the grantor spouse is transferred into the SLAT, the donor spouse has the option to pay rent to the trust. This would have no income tax consequences to the grantor if the SLAT is a grantor trust, enabling the grantor to make additional gift-tax free transfers to the trust.
12. On divorce the trust can divide into one SLAT for the spouse beneficiary and another SLAT for the grantor’s descendents with a new trustee. Floating spouse provisions can also be included addressing a possible death of a beneficiary spouse and should the grantor enter into a new marriage.

Spouses wishing to set up reciprocal SLATs need to be aware of the “reciprocal trust doctrine” which suggests that if the two trusts are too similar, the assets of both trusts could be included in their respective estates if challenged by the IRS. Also, the trusts could be subject to creditor claims. Therefore, trusts should not be created in mirror images of each other. It is safer for any trust funded by the recipient spouse to be for descendants only. For single individuals, there are alternatives that can work as well. One is a variation is called a domestic asset protection trust, permitted in 19 states, where the grantor can be the beneficiary of their own trust with access ability.

SLATs are a powerful estate planning tool for couples who would be resistant to transfer a significant amount of assets to their children, thus losing all access to those funds. Given the proposed tax law changes on the horizon, some of which would impact the benefits of SLATs, now is the time to reach out to your investment or family office banking advisor to develop tax saving strategies for you and your family. If you have any questions, we would be happy to delve into more detail as it pertains to your specific situation.

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Daniel F. Rahill, CPA, JD, LL.M., CGMA, is a managing director at Wintrust Wealth Management. He is also a former chair of the Illinois CPA Society Board of Director and is a current Board Member of the American Academy of Attorney-CPAs.